More bad news this week on the real estate and mortgage markets. It looks like sales of homes in California were down 28% in August as compared with August 2006. Not to be outdone, new home sales data shows that sales dropped 8.3% in August from the already depressed July levels, the lowest level of sales in 7 years… well, you get the picture. The news is equally bad in the mortgage markets, where interest rate adjustments on adjustable rate mortgages are creating turmoil. So what do we do about it? We tried lowering rates, but that didn’t have the impact we had hoped for. There are all kinds of solutions being floated, like raising the FHA & FNMA loan limits in California to a more realistic level. There is even talk of a federal bail-out of troubled loans.

All of these sound great, but what we really need is action. We need to “take the bull by the horns” and solve this situation before we all go broke. So what can we do? After great deliberation (and a few glasses of Cabernet), I came up with the answer… hold a concert! You know, the big stage, mega-produced, pay per view, live satellite type with huge rock stars playing to audiences across the globe. Hey, it worked for Africa, farmers, AIDS, and global warming! I mean, we have solved all of those problems, haven’t we? (Er… on second thought, disregard this last question). Still, it is not really important that we solve the problem, only that we get together and feel bad about it.

The possibilities are endless. If you are skeptical, think about the power of massive audiences swaying hand in hand while John Couger Mellencamp belts out “Pink Houses”. Or thousands of people across the globe singing with Crosby, Stills, Nash, & Young (assuming David Crosby is not in jail) while they run through “Our House”. And why stop there… maybe we can get some tie-died 60’s holdovers to burn their mortgage statements while shouting “Hey Hey, Ho Ho. Rate Adjustments have got to go!”. We could have Al Gore fly to each site in his private plane to show how concerned he is with the real estate slump. We could have Katie Couric report live from the concerts and interview starving Realtors and mortgage brokers, showing great concern and compassion as the interviewee explains that they can’t afford the lease on their Mercedes S class anymore. Maybe for a grand finale, we could have Simon & Garfunkle sing “Bridge over Troubled Lenders” while all the rock stars come out on stage.

I think we might have something going here. We could call it “RealAid”, or “LoanAid”. All of the proceeds could go to help make mortgage payments for dozens of strapped borrowers, or give a little something to the National Association of Realtors. After all, this is America. When the going gets tough, the tough hold a concert.

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So hot off the heals of the Fed’s lowering of the Discount Rate by 50 basis points (.5%), there was great optimism that this would give a shot in the arm to the struggling housing market. Much of the population, including many realtors, assume that the Fed has lowered Mortgage Rates, and that it is the Fed that controls the interest rates on mortgage loans. Just to dispel any misconceptions about this, take a look at the graph below. It shows the Federal discount rate, which the Fed just lowered last week, and both conventional (i.e., under $417,000) and jumbo fixed rates. And guess what… after the Fed lowered their rates, the rate on 30 year fixed mortgage loans did change: They went up. (click on graph to enlarge)

So why is this? First the easy part. Long term interest rates are set by the market, not by the Fed. It is the bond market that determines the direction of long term interest rates, and it is subject to our old friends supply and demand. The largest factors for the direction of long term interest rates are the threat of inflation and future strength of the economy, and they are related. So why would the Fed’s lowering of the Discount rate cause long term rates to rise? Because investors view the Fed’s cut of these rates as potentially inflationary, or increasing the risk of future inflation. Further adding to the concern is the government’s moves to add liquidity to the financial markets and banking industry, which while helping the struggling capital markets, also increases the money supply in circulation. Both of these moves can be perceived as adding to the risk of inflation, especially when the cost of energy (oil) is now at an all time high, which is also fuel for inflation. And if the economy heats up on top of these events, we could see more increases in long term interest rates, which is where mortgage rates are tied.

Take a look at this graph. It again shows long term mortgage rates (both conventional and jumbo), and the Purchasing Managers Index, which is an index that predicts the future strength of the economy (there are several). There is a very strong correlation between the direction of the Purchashing Managers Index and long term mortgage rates.(click on the graph to enlarge)

The September jobs numbers are due out in a couple of weeks, and if they show that employment has slowed, and therefore the economy is slowing, then there will generally be downward pressure on long term rates, as there will be less threat from inflation. If, however, the jobs numbers show employment is growing and the economy is heating up, look for increases in long term rates.

This puts us in somewhat of a predicament. On the one hand, the Real Estate Industry wants low, stable long term rates, which means we benefit when the economy slows down (unemployment increases). But of course, if the economy slows down too much, we will be in a recession, and that would be bad for business as well. What we really hope for (and what the Fed is trying to achieve) is slow, steady growth without inflation. The Fed tries to balance this by controlling the Discount rate (the rate banks can borrow money from the Federal Reserve).

I have on occasion heard some people say “Wouldn’t it be great if fixed mortgage rates get below 5%!”. Unfortunately, for that to occur, we would likely have to be in a deep global recession where there is little demand for capital from consumers and businesses, and if that occurs, most people are not going to be comfortable buying anything, let alone a house. Remember, the goal of the Fed is slow, steady, sustainable growth with low inflation. When growth slows too much, or there is risk of recession, the Fed will generally step in and lower the Discount Rate, which in effect lowers short term interest rates. When the economy starts to heat up and inflation becomes a concern, the Fed will generally step in and raise their rates to slow down the economy. Think of this analogy: It is like the Fed is driving a car (the economy), and it alternates between the gas pedal (lowering rates) and the brakes (raising rates). Let’s hope Bernanke is a good driver…

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It looks like some major home builders are starting to run “Sales” to generate interest in their subdivisions. This is not a new tactic, but it certainly is an indication that things are not well in the new home market. First there was Hovnanian Enterprises, who last weekend announced (with much publicity and fanfare, I might add) a 3 day sale at their subdivisions in 19 states across the country, including California. The sale effectively reduced prices by as much as $100,000. There is no truth to the rumor that if you use your Macy’s card for the purchase, you get an additional 10% off.

Not to be outdone, KB Homes just announced a 24 hour sale. They are offering a flat $20,000 this weekend only for home buyers to spend as they choose…. a purchase price reduction, upgrades, closing costs, or mortgage buydowns. This applies to homes that are complete or near complete.

Lennar Homes, a major national home builder, recently slashed the price of it’s standing inventory anywhere from $100,000 to up to $200,000 on their homes in Tassajara Valley in Danville. These homes are in the $900,000 to $1.4 million range.

Even Shappell, the “Oakland Raiders” of home builders who are legendary in their tight-lipped and uncooperative approach to business, are dealing on their new home standing inventory.

All of this highlights one problem with buying a new home. The builder sets the price of the home, and controls the data (often throwing in incentives, etc), so a buyer never really knows what the market value of the home is. For example, when you buy a new home for $900,000, and the builder gives you $100,000 of incentives, the value of that home is not $900,000. In fact, the value of the home might not even be $800,000. Because the value of the home is what the resale market is willing to pay for it. When you buy a resale home, the buyer can find out exactly how long it has been on the market, what the price has been, and can get an idea of the demand for that home. Builders put up little “Sold” and “Reserved” buttons on a map. Now of course, these are new homes, which is always desirable. But keep in mind you still have to put in landscaping and window coverings, so be aware of what your total investment is. It very well might exceed what the market value of the home is. Now, if they would just give me that extra 10% off for using my Macy’s card, I might even buy one.

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The Pleasanton CA real estate market continued to limp along in the first half of September, with inventory dipping slightly, but sales off fairly sharply from August levels. Overall, available inventory of single family homes stood at 217 at the middle of September, down slightly from 220 at the end of August. Pending sales activity for the month of September to date is off from August levels, with 16 pending sales so far in September, as compared with 44 pending sales in the month of August. The high point for pending sales this year was in June, when there were 67 pending sales registered. Here is a graph that illustrates the trends this year, including September to date (which is not a full month, obviously). Click on the graph to enlarge.

So what is in store for us as we enter the fall? The Fed just lowered the Federal Funds rate and the Discount rate 1/2% each, perhaps providing a shot in the arm to the slumping mortgage credit markets. This is a larger rate cut than what was expected, and hopefully this will add some positive momentum to the housing market. It will be interesting to see if this impacts the sales and inventory figures for the second half of September. Stay tuned…

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The East Bay Regional Park Distirict has announced a plan to add almost 1500 acres to the Pleasanton Ridge Regional Park. With a generous donation from Curtis Priem of Fremont, who is contributing $1.75 million to the total purchase price of $6.63 million, the Pleasanton Ridge Park will add a vital piece of land bordering Sunol and Niles Canyon Road, as well as an additional staging area further South on Foothill Rd. It will also bring the district one step closer to their long term plan of linking the Pleasanton Ridge Regional Park with the Mission Peak Open Space.

Park officials say the Tyler Ranch property land along Sunol Ridge is a recreational gem.

Rising from Niles Canyon near sea level to 2,000 or more feet, the ridge has wide dirt trails for hiking, bicycling and horse riding, and panoramic views of the San Francisco Bay to the west and the San Ramon, Livermore and Central valleys to the east.

“It has amazing views,” Ayn Wieskamp, a regional park board member from Livermore, said Thursday during a visit to the property. “People are going to love to come here, but they’re going to have to work hard to get up the ridges here.”

As she watched, the salt ponds in southern San Francisco Bay glittered in the sunlight. A kestrel, a small member of the hawk family, flapped its wings to hover in the air over tawny brown grasslands.

Courtesy of the Contra Costa Times.

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It’s usually good to be first, but for Stocton, the news is not good. Stockton was just named the foreclosure capital of the U.S., with the highest foreclosure rate of any U.S. city. There have been 8000 foreclosures year to date. There are currently 2800 homes on the market in Stockton, a city with a population of 285,000. To put this in perspective, Pleasanton has a population of 68,000, and currently has 220 homes on the market.

Or put another way, if we had the same relative level of inventory and rate of foreclosures as Stockton does, we would have 700 homes on the market right now (as opposed to 220) and over 1900 foreclosures, or almost 250 foreclosures a month. Obviously we are no where near that.

In short, we have a lot to be thankful for here in Pleasanton, even with the sluggish real estate market. Next time you are tempted to complain about how slow the market is, or how much value your home has lost, just remember…. it could be worse. A lot worse.

Courtesy Yahoo news.

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There is more and more talk about the Federal Reserve Board lowering the key Federal Funds rate, as early as next week, as pressure builds for the Fed to take action to help offset the damaging effects of the credit crisis. Adding to this pressure is last week’s national jobs report, which showed that the nation’s payroll shrank for the first time in 4 years, stoking fears that the credit crunch is tipping our economy into recession. However, the expectation of lower interest rates caused the dollar to sink to a new low against the Euro.

Let’s hope they lower rates soon. It would send an important message that the Fed will take strong action to keep our economy steady, and help ease some of the pressure on the capital markets.

Meantime, the UCLA Anderson Forcast for the California economy predicts that while the economy has slowed, it will not tip into recession in the foreseeable future.

Mortgage defaults and a “sustained lull” in home building will weigh on California’s economy for at least another year but will not tip the state into a recession, according to a forecast released on Wednesday.

“Overall, our forecast is that California is in for at least another year of these economic doldrums, with rising unemployment, weak job growth and a slowdown in all broad indicators,” said a report by the UCLA Anderson Forecast.

Barring a substantial worsening in housing or another source of weakness suddenly appearing, California’s sluggish economy “will not spiral into a full-blown recession,” the report said.

Let’s hope the Fed’s actions will provide confidence and a stimulus to help lift our economy out of the doldrums.

Courtesy Yahoo News.

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I get asked a lot about the local Pleasanton, Dublin & Tri-Valley real estate market, and how long this slump is going to last. In my opinion, I see the current slump lasting a while longer. In 1989, when I started selling real estate, the market peaked after strong appreciation in the late 1980’s. Once the market corrected (which took a couple of years), we entered a stagnant period where prices remained relatively flat, before we finally started to see appreciation around 1996. My best guess (and, after all, it is only a guess) is that we are in for a similar pattern now. We are essentially 2 years into this slump, and there is no sign that it will ease up anytime soon.

In my view, it comes down to two main factors… affordability and liquidity. What stalled the market in 2005 was affordability. After roughly 40% appreciation in a 3 year period ending in 2005, the market simply outpaced people’s ability to afford it. Indeed, the California Association of Realtors Affordability Index showed that only 24% of households in California can afford the median home price for the state, which is currently $586,000. In the move up market and the higher end market, the effects were not as pronounced at first, because buyers had swollen equity and ridiculously low interest rates to help offset the costs of moving up. But the largest impact was on first time buyers. Prices moved so strongly that many were simply priced out of the market, while others decided it was not worth it to own in this market and chose to rent instead, or move to other areas where they could afford it.

Liquidity in the real estate market usually comes from the bottom up. Activity in the low end will create demand in the mid range, as sellers of condos & townhomes look to move up into a single family home. And activity in the mid range helps create activity in the upper end of the price bracket, again with sellers becoming buyers. When the entry level slows down, it usually effects every price point. As always, the challenge for our market is to have enough affordable entry level housing to enable buyers to build equity in time, thus creating long term demand for higher priced points.

The second aspect of liquidity is the current mortgage market. When the market was really moving in 2004 & 2005, and even up to this year, it was relatively easy to obtain bridge financing or use other tools to help move up buyers purchase another home without first selling their existing home. If the buyer had good credit and strong equity, it was very common for them to submit non-contingent offers without having their home sold. This helped create the over-heated market we saw between 2003 & 2005. Now, the situation is reversed. With all of the problems in the mortgage market (in part due to lax underwriting standards), it is much more difficult for buyers to buy a home non-contingent without having their home sold. And marginal buyers with below average credit or small downpayments were able to get loans prior to the mortgage market meltdown, but now are not able to get financing, which eliminates a fairly large pool of buyers from the market.

So what is going to ultimately stabilize the market, and start fueling appreciation? A combination of three things… increases in personal incomes & wages, lower interest rates, and price deterioration. These are the three factors have the most dramatic impact on affordability. Until our market becomes more affordable, through one or more of these factors, we will likely have to endure a soft real estate market. It is the increase in demand from entry level and first time buyers that will ultimately create demand in other price segments, and help propel the market out of the current doldrums.

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The August numbers are in for the Pleasanton real estate market, and the market has definitely slowed. The available inventory of single family homes ended the month at 220, up from 206 at the end of July. Fortunately, this is still relatively low given the circumstances, and the fact that inventory has remained stable has helped mitigate the weakness in the market. There were 44 pending sales in the month of August, which is down from 54 at the end of July and 67 at the end of June. With inventory trending up and sales slowing, the market has certainly slowed. (click on graph to enlarge)

In the low end range in Pleasanton (under $1 million), inventory trended up, finishing at 108 single family homes on the market, up from 102 at the end of July, and 51 at the end of February. Pending sales slowed as well, with 32 pending in August, as compared to 39 in July. For comparison, there were 41 in February of this year. (click on graph to enlarge)

The mid-range real estate market in Pleasanton (between $1 million and $2 million) also showed similar trends, with August ending with 70 homes available, up from 67 at the end of July. Pending sales for the month of August were down slightly, ending with 11 pending sales for the month, down slightly from 12 in July. (click on graph to enlarge)

The high end market in Pleasanton showed perhaps the most weakness, with available inventory ending the month of August at 42 listings, up from 37 at the end of July. Pending sales in August in the luxury price segment dropped to 1 for the month, compared with 3 for July. Overall, this segment of the market remains sluggish. (click on graph to enlarge)

The mood of the market seems to be very deliberate. Buyers are cautious, and do not seem to be in a hurry. With the constant barrage of negative real estate news and turmoil in the mortgage markets, buyers sense that they have the luxury of time, and many are more inclined to “wait and see what happens”. Inventory, in spite of all the doom and gloom in the real estate market, is still at manageable levels. Many sellers have decided to postpone their move, and wait until things improve. The more motivated sellers are embracing price reductions, and are finding that they must do more to get their home ready for the market. However, value still sells, and well-located, high-appeal homes in great neighborhoods at aggressive prices are seeing the most interest from buyers.

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As we come up on the 6th anniversary of Sept 11th, I would like to take a moment to remember one of the heros of flight 93, Tom Burnett. Tom was 38 years old on that day, and along with many other brave souls, fought back valiantly under extraordinary circumstances. Tom left behind his wife Deena, and 3 beautiful young daughters. Tom worked in Pleasanton, where he was president of Thoratec Inc, a medical research and development company. He was also a member at Clubsport, lived in San Ramon, and had many ties to this area.

There is an informal memorial to mark this anniversary at the corner of Stoneridge Dr and Thomas Burnett Lane in Pleasanton, in front of Thoratec. Please feel free to drop by flowers or cards, or express your support through a moment of silence or a prayer. As we go about our hectic lives, I hope we can find time to remember someone who paid the ultimate price, and the family he left behind.

If you would like, you can also contribute to the Tom Burnett Family Foundation

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