The real estate market's fortunes may be pinned to the banks' and federal government's efforts

By Roger Cruzen

You’ve survived two of the worst years for California real estate in decades by maintaining a positive attitude and focusing on helping your clients navigate an unfamiliar and sometimes treacherous real estate landscape. You’ve become adept at discussing price reductions with stubborn sellers and have learned a host of valuable new skills, like facilitating a short sale and helping buyers sort through foreclosure opportunities. You’ve even become an armchair economist, poring over mountains of MLS and other data so you can provide the best possible counsel. • Just when it seemed that both buyers and home sales were beginning to perk up and California was beginning to work off some of its hefty inventory of foreclosures, the nation’s financial markets collapsed. While Congress and regulators sorted out an emergency bailout plan, consumer confidence crumbled under the weight of stock market losses and ever-tightening consumer lending standards. • Now, with the presidential election over and a new administration taking shape, REALTORS® are taking a deep cleansing breath and wondering: Is the market going to improve in 2009, or will a protracted recession erase the possibility of a recovery? Will mortgage money be available to meet buyer demand, particularly in high-cost markets? Have we seen the worst of it, or is there more bad news to come? • California Real Estate asked some seasoned observers to share their “best guesses” in these and other key areas of concern to REALTORS® in 2009:

Economic Forecast: Cloudy, With a Chance of Recession

ill the California real estate market improve appreciably during 2009? The answer depends on where in the state you do business and whether federal bailout and other economic stimulus measures are effective in staving off a prolonged recession.

With processes and more people now in place to manage the backlog of short sales and bank-owned properties on their books, most banks are better prepared than they were during much of 2008 to market and sell REOs. That fact alone should help sales of single-family detached homes climb by 12.5 percent to 445,000 units statewide, up from a projected 395,000 units in 2008, according to C.A.R. This news is particularly welcome in the inland areas of the state, where the subprime mortgage crisis first took hold and where there continues to be a large inventory of properties for sale. REALTORS® from inland San Diego County through the San Joaquin Valley and all the way north to the Oregon border are reporting rising interest from first-time buyers with good credit and the now-requisite down payment and from investors looking to cherry-pick bargains the likes of which haven’t been seen for two decades.

Their interest stems from steep price declines that have significantly boosted affordability in all but the priciest urban California markets. Statewide, the median price of a home sold is expected to decline by 6 percent from $381,000 in 2008 to $358,000 in 2009. Even so, prices should continue to decline in many communities even as the number of home sales picks up.

One of the wild cards in the 2009 deck (and there are lots of them) is the U.S. and California economies, according to C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Clearly, the news about the overall economy is increasingly dire. There is a tremendous amount of uncertainty that is being reflected in the financial and real estate markets.” Escalating job losses, declining retail sales, and cash troubles at American auto makers all threaten to forestall a meaningful economic and real estate recovery, she adds. “The issue is confidence. People don’t buy homes when they are worried about losing their job.”

A Matter of Mortgage Capital

Perhaps the most significant wild card is the availability of mortgage credit. As long as mortgage money is available, there will be buyers and closed transactions, experts say.

“One thing we can say for sure is that the conforming market will be a source of growth and strength in 2009 as the California real estate market continues to experience increasing sales of foreclosed properties,” says Appleton-Young. “The real issue for 2009 is the availability of credit, particularly at the high end of the market, which has held up fairly well so far but is vulnerable when you combine a weakening economy and financing that is at a premium.”

Jae Wu, certified mortgage planner with the Wu-McMillan Group in Los Angeles, predicts her high-end ($1 million-plus) clients will continue to keep the upper-bracket markets active during 2009. She’s hopeful that the federal bank bailout and other rescue measures will encourage the healthiest lenders, who are less afraid to make a large loan and keep it in-portfolio, to ramp up availability of mortgage loans to this market segment.

“I foresee the larger banks bringing products back to the market for the million-plus borrower—a market that has contracted over the last 18 months,” says Wu. Her greatest worry is continued weakness in the stock market, where high-end buyers traditionally turn to fund down payments.

It’s the middle spectrum of the market—homes priced close to the current FHA conforming loan limit of $417,000–that most worries California market-watchers.

“FHA will be the key word in financing for the next three to five years,” observes David Gardner, manager of Prudential California Realty in Walnut Creek. “It’s hot out there for anything under the conforming loan limits.”

But can FHA manage the volume of loans it will be asked to approve in 2009?

Gardner isn’t too concerned. “There may be brief periods where a 20- to 30-day escrow becomes 30 to 45 days, but I can tell you there are a lot of people out there who would love to have to start working until 6 or 7 in the evening processing loan paperwork again,” he notes.

The kind of innovation in mortgage lending products that, in part, created the boom market has been missing during the downturn. Will such creativity return in 2009 as politicians and real estate industry leaders consider measures aimed at turning the market or helping homeowners facing interest rate resets or foreclosure? Observers certainly hope so.

“Those of us involved in real estate finance need to take another look at the risk factors that determine whether to make a loan and come up with products for people who may have one of those risk factors but who are still a very good credit risk,” says Fred Arnold, president of the California Association of Mortgage Brokers (CAMB). “It’s going to take a lot longer to get out of this cycle if we don’t develop sensible products to help people get out of a bad situation and provide a reasonable return to banks in return for their risk.”

Will Bailout Measures Stop the Bleeding or Prolong the Agony?

In the end, 2009 may be known as “the year of the bailout.” Whether measures already taken will lubricate the gears of mortgage lending, adequately protect the interests of homeowners with troubled mortgages, and boost home buyer confidence remains to be seen. And whether these proposals or those yet to come will reverse the damage or kill the patient is anybody’s guess.

Skeptics, like Pepperdine University real estate professor Dennis Torres, predict the combination of a sinking economy and well-intentioned but flawed mortgage rescue plans that ignore the fact that many can’t afford to pay even with assistance will stall any meaningful recovery until as late as 2015.

But Appleton-Young and others in the REALTOR® community believe there is a considerable case to be made for the kind of solutions NAR proposed in November that seek to provide relief in several key areas and jump-start real estate sales.

“It’s pretty clear there will be a stimulus package, it’s just a matter of when,” she predicts, adding that while bailouts and helping homeowners are critical, “nobody knows where the bottom is.”

Have We Hit Bottom?

Every home buyer and seller wants to know: Has the California real estate market hit bottom? The answer is “yes” if you’re talking annual home sales and “not yet” if you’re looking at median home prices, according to the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) 2009 economic forecast.

As the chart below shows, the saleas picture is brighter than it was a year ago based on projections that home sales will jump almost 25 percent compared with 2007, when sales hit bottom. C.A.R. forecasts a relatively modest 6 percent slide in the statewide median home price in 2009 after a record

decline in 2008.

“We see a bottom or near bottom with more stable prices on the horizon by the second half of 2009,” says C.A.R. Deputy Chief Economist Robert Kleinhenz. “This reflects the continued influence of the foreclosure market on the statewide median price.”

Since 1970, California has recovered from two significant downturns. The first, between 1978 and 1982, featured a 61 percent plunge in sales (far worse than the recent 44 percent drop) and was driven by double-digit interest rates that put mortgages out of reach. The second, between 1988 and 1994, was sparked by a national recession in 1990-91 and by subsequent massive job losses statewide in defense, aerospace, and financial services.

The current market problems were precipitated, not by high interest rates or a declining economy, but by a succession of developments, beginning in early 2007 with the so-called subprime mortgage market meltdown, followed later in 2007 by the credit crunch, which grew into a full-blown financial

freeze in the fall of 2008. Each of these did damage to the housing market, but the last two developments undoubtedly weakened the economy.

Only in recent months–three years into the current housing downturn–has the market faced a new challenge in the form of an economic recession, which will very likely delay a turnaround in the market.

While statewide trends are worth a look, Kleinhenz advises that market performance varies drastically by city, and even between ZIP codes. “What counts is the trend in local-market prices,” he says.

Ultimately, timing the market may be neither possible nor advisable. “Timing matters a lot less if you are buying a home you are going to live in for seven or 10 years,” he adds. “For buyers who adopt a long-term strategy, it may make sense to go ahead and buy when they find a home that both meets their needs and is affordable, because it might not be available six months from now.”

Roger Cruzen is a freelance writer and public relations consultant based in Minneapolis, Minn.