2008 was a year of seismic changes for the real estate industry 
 

By Roger Cruzen

Turn the “8” in “2008” on its side and you have the symbol for “infinity,” an ancient mathematical, cosmological, and religious concept loosely defined as something that is “without end.” • “Endless” also is how California REALTORS® might describe 2008. While few expected a full-scale turnaround and return to the boom years, the combination of record home foreclosures, fast-tumbling home values, and skyrocketing gas prices that sent the economy perilously close to recession and forced a government takeover of IndyMac Bank, Fannie Mae, and Freddie Mac caught many by surprise. • Here, then, are a few highlights—and lowlights—of a year some say can’t end soon enough.

In California, the Numbers Tell the Tale

Only the most pessimistic observers would have predicted back in 2005 that the number of homes sold in a year in California would plummet from 625,000 units at the peak to roughly 60 percent of that number by the end of 2008, or that more than two-thirds of home sales would involve foreclosures. Neither would they have anticipated that fast-rising inventories of foreclosed properties would cause home values in the inland areas of the state to tumble by more than 50 percent in a matter of months while the market in higher-priced coastal areas remained relatively stable.

“My mantra has been that prices couldn’t keep going up forever,” says C.A.R. Chief Economist Leslie Appleton-Young. “But the two biggest surprises in 2008 were how quickly prices dropped, which put more homeowners underwater and pushed foreclosures way beyond what anyone had forecast, and the positive response we’ve seen in sales since April. That said, the ratio of home sales to REALTORS® is far worse than in other down cycles, which has made it very difficult for REALTORS® who entered the business in 2004, 2005, and 2006.”

If forecasts hold up, home sales statewide for 2008 will total 395,600, up slightly from annualized sales of 353,300 units in 2007. That improvement reflects a significant midyear uptick in the sale of foreclosed properties that halted a 30-month string of year-over-year statewide sales declines.

Because home prices aren’t expected to recover until the market burns off  the excess inventory of distressed properties, the statewide median price is expected to end 2008 at $381,000, down 31.7 percent from the 2007 median of $558,100.

What did improve during 2008—dramatically—was housing affordability. As prices plunged and interest rates held steady, the percentage of Californians who could qualify to purchase an entry-level home doubled to 48 percent over 2007 levels.

“Compared to where values have been, affordability is fabulous,” says Appleton-Young.

Legislation Focuses on Helping Troubled Institutions, Homeowners

In response to the worst real estate slowdown in decades, elected officials turned their attention to propping up the economy, assisting homeowners facing foreclosure, and ensuring the ongoing health of banks and the secondary mortgage market.

President Bush and Congress in February provided what they hoped would be a booster shot to the economy, passing the Economic Stimulus Bill of 2008. Then, in July, Congress passed and the president signed the sweeping $300 billion Housing and Economic Recovery Act of 2008, which among other things sought to secure the financial viability of Fannie Mae and Freddie Mac. It wasn’t enough. In early September, President Bush took control of the two mortgage giants. At press time, Congress passed a $700 billion rescue package, designed to infuse liquidity into the financial system.

In California, meanwhile, REALTORS® scored a major victory for their clients through grassroots efforts that convinced the author of AB 2678 to drop provisions that had good intentions but would have had unintended negative consequences for home buyers and sellers by requiring homes and commercial property on the market in California to undergo an expensive energy audit at the point of sale. The bill also would have required that consumers invest in energy-efficiency measures.

Lenders Change the Rules

The odds of qualifying for a mortgage loan in California during 2008 seemed similar to those of winning the lottery. Trouble was, even a lottery winner might not qualify thanks to a crackdown on underwriting criteria that made it far more difficult for REALTORS® to complete transactions and mortgage brokers to arrange loans.

Gone are the boom market interest-only option ARMs, no down payment-stated income loans that got people into homes and, when property values dropped and they couldn’t sell or refinance, into financial trouble. In 2008, buyers became a scarce commodity, and even when REALTORS® did find a buyer, banks often rejected short sale offers and property appraisals, and private mortgage insurers increasingly balked. REALTORS® who had never done an FHA-insured transaction scrambled to learn the ins and outs as the decades-old program—rarely used in California in recent years—suddenly became the mortgage program of choice.

Were it not for FHA and temporary moves by Congress to increase loan limits on conforming jumbo loans, home sales might have dipped even further, according to Fred Arnold, who heads American Family Funding in Stevenson Ranch and is 2008 president of the California Association of Mortgage Brokers (CAMB). Arnold believes the impact of the market downturn in 2008 might have been softened if not for lenders who over-tightened underwriting criteria. He also blames a lack of mortgage products to help troubled borrowers out of bad loans or put reasonably qualified new homebuyers into safe, fixed-rate ones.

“It wasn’t until this summer that working Californians who had been locked out of the buying process were able to start jumping in,” Arnold observes. “There still are great programs out there for first-time buyers as long as they are W-2 employees and have been [at their jobs] for two years. But there are a lot of Californians who are self-employed and who essentially have been locked out of the market.

“We’ve got firefighters working tremendous amounts of overtime who can’t get a home because their overtime pay doesn’t count as income,” Arnold continues. “I’ve had clients with a million dollars in the bank and who were able to put 30 percent down but couldn’t even get a loan.

“Unfortunately, almost all the products developed during the last four or five years were subprime products,” he laments. “All those organizations that created these products are out of business or there is no liquidity in the mortgage-backed securities market to finance products for people who are still a very good credit risk.”

Roger Cruzen is a freelance writer.