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Real Estate - January 2, 2009

Happy New Year?

Maybe it won't be so bad after all

by Dave Walden

For those worried about the economy and their investments, it may not seem like a very happy New Year. However, it is times like these that we should stop and reflect upon our long-term blessings.

Worried about home prices going down? Yes, median prices were down to around $180,000 last month. This drop was more than 13 percent in one year and represented the largest one-year plunge since the Depression.

Would you like some perspective? Median home prices were approximately $80,000 in 1990. In other words, prices are up 125 percent over the past 20 years even factoring in the recent decline. And with lower home prices and record low rates, homes are now as affordable as they have been for the past decade.

The stock market? Down 40 percent in a year. Obviously stocks are much more volatile than real estate. A drop in a portfolio of 40 percent in one year has to be unnerving. Here we have another historical perspective. In 1990, the Dow Jones average hovered around 3,000 as opposed to the 8,500 during the final month of this year. This also represents an increase of over 100 percent.

There are many who see tremendous buying opportunities in stocks right now, just as many are crowding auction houses to get a chance to bid on real estate bargains.

The message? In every down market opportunities are created. Those who benefit are the ones who step in and take the opportunity of today. The markets will turn around. Those who wait to act are more likely to miss the opportunity. And that is the reason it is a happy New Year. Because we live in a country that gives us the ability to take advantage of opportunities and take the risks that go with these opportunities.

The Markets.

Mortgages continued their assault on record lows as they dropped for the eighth week in a row. Freddie Mac announced that for the week ending Dec. 24, 30-year fixed rates averaged 5.14 percent, down from 5.19 percent the week before. The average for 15-year fixed fell slightly to 4.91 percent. Adjustables were mixed with the average for one-year adjustables increasing slightly to 4.95 percent and five-year adjustables falling to 5.49 percent. A year ago 30-year fixed rates were at 6.17 percent.

"Rates on 30-year fixed-rate mortgages eased for the eighth straight week and set another record low since Freddie Mac's survey began in 1971," said Frank Nothaft, Freddie Mac vice president and chief economist.

"Real GDP growth fell 0.5 percent in the third quarter of the year, pulled down by the largest drop in consumer spending since the second quarter of 1980," he added. "The market consensus calls for an even larger decline in the last three months of the year."

"The housing market, meanwhile, continues to contract," Nothaft continued. "Existing home sales (excluding condominiums and co-ops) fell 8.6 percent in November to 4.0 million houses (annualized) in November, representing the slowest pace since July 1997."

Financial mogul Sam Zell, owner of the Tribune Co. which recently declared Chapter 11 bankruptcy, told an Israeli business conference a few weeks ago that the U.S. real estate market will be in recovery by spring 2009.

Zell pointed out that the U.S. population is growing and with fewer than 600,000 building starts in 2008, a million fewer than any of the last 10 years, demand for housing will rise. Zell blamed the current crisis--at least in part--on ill-considered decisions.

"We are living through our first Blackberry recession where, literally, information is instantly disseminated around the world and people, in effect, respond to it, perhaps, often without any particular caution or attention," he said.

Sales are picking up in markets where prices are deflated, but the business is different than it was before the bubble burst, observers say. The housing market in deflated markets, including California, Arizona, Florida, and Nebraska, are beginning to show signs of a rebound.

Analysts say that prices have fallen to the point that those with average salaries can afford to buy once again.

"The buyers are returning," said Lawrence Yun, National Association of Realtors chief economist. "And in such a strong way that now we are hearing in some cases there is multiple bidding, which hints that maybe pricing is reaching a bottom point. But inventory remains high."

In California's San Joaquin County, sales in September and October reached sales levels about equal to business at the height of the boom in 2005, says DataQuick, which provides property data.

But new buyers are primarily first-timers and investors looking to cash in. Local practitioners say the buyers are primarily local residents who have cash to spend.

"It's the couple down the street that has a nice nest egg and who wants to put it into something that will give them a good return," said Bev Marlow, head of the Central Valley Association of Realtors.

With the exception of cash transactions, investment activity in commercial real estate sectors is nearly at a standstill because commercial lending has essentially halted, while job losses are curtailing the demand for space, according to the latest Commercial Real Estate Outlook of the National Association of Realtors.

Lawrence Yun, NAR chief economist, said there are serious structural problems in commercial lending.

"Although access to residential mortgages has improved, the opposite is true for commercial loans," he said. "We need liquidity for commercial mortgage-backed securities not only to free the market, but also to rollover existing debt. At the same time, the loss of jobs has had a significant impact on the demand for commercial space."

Yun added that default rates on commercial real estate loans are very low by historical standards.

"However, commercial defaults could deteriorate significantly without a properly structured stimulus that addresses liquidity for commercial mortgages," he said.

David Walden is a Certified Mortgage Planning Specialist and Certified Divorce Planning Professional associated with Diversified Capital Funding of Pleasanton.

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