A Year to Forget
The best thing to be said about the 2009 real estate market is that it is 2010. I am relieved that this leaky boat, also known as the national economy, managed not to founder in a sea of debt and incompetence. For most Americans, keeping their jobs and homes for another year was a success unto itself; survival is the new victory.
Doing nothing last year was a good strategy but will not be for long. Residential real estate should cease dwelling in the bargain basement by year end. The local housing market will continue to shed over-leveraged properties by way of short sales and foreclosures, but the distressed-home market will stabilize by year end as banks run short of inventory. Contributing to this change will be a combination of Federal intervention into loan modifications and short sales plus the running of the natural course of the business cycle. There will be an exception in expensive market segments. Many owners of expensive homes are running out of financial reserves and may have to start unloading their houses at bargain prices.
The Third Bank of the United States
Like it or not, Washington will have an even more heavy-handed presence in real estate for the next several years. There is an army of experts who argue that any more Federal interference into the market will exacerbate the problem and postpone the cure. But 2010 is an election year and unless the public perceives that housing is on the mend, there will be bloodletting this November, threatening the President's slender governing majority. Do not underestimate this President's willingness to intervene in free markets; he has publicly criticized the performance of mortgage lenders for their sub-standard work with troubled borrowers and may be running out of patience with their desultory performance. He has the ability to use Freddie and Fannie in a far more aggressive manner and create a virtual 'public option bank'. As you may recall, the taxpayers already own 80% of those formerly public companies giving the President plenty of leverage. Given this power he has tread lightly thus far but unless more loans are modified and foreclosures forestalled, I suspect this President will not be afraid to expand the traditional role played by Freddie and Fannie in the mortgage market.
In commercial and business lending, the Administration is having little luck in getting the credit logjam unstuck. Realistically the Feds can do little to force a Citibank or a community bank to loan money to start-up companies or to extend the maturity date of a shopping center mortgage. The latter is of particular concern since thousands of commercial loans are coming due in the next three years. Refinancing the majority of those loans will be nearly impossible given the fact that commercial values have been crushed by this recession.
Washington has tried mightily to get credit flowing. They loan money to banks at the discount window for next to nothing, risking the wrath of the gods of inflation. Congress and the Administration are continually criticizing the industry for their collective inaction, but to no avail. For the moment, banks seem content to build their reserves and invest in treasuries. Their current business practices remind me of Major Major Major Major, a character in Catch-22. If you wanted to see him he was out. If you didn't want to see the Major, he was in his office.
Speaking of Predictions
This year more troubled residential and investment debt and equity is going to be re-priced, in some cases to zero. The country has to chip away at a still considerable pile of bad residential and commercial mortgages as there is little prospect of meaningful appreciation in the short term. 2010 will be a lackluster year but certainly better than 2009.
But since you may think otherwise, I am going to sponsor a modest contest. Email me your predictions for where four key housing indicators will stand on January 1, 2011. I will total your percentage error for each indicator and the lowest total percentage error amount wins. The winner will receive two great Padre seats behind home plate and mention in this column and perhaps be given some sort of title befitting a worthy oracle.
Here are the four contest indicators: First, the Case-Shiller Housing Price Index for San Diego. You need to predict the 2010 percentage change in this index. The last available data covered the period of September 2008 to September 2009 and showed a 5.7% decline prices. Second, the San Diego County median home price as provided by MDA Data Quick. Their median price was $315,000 for this past November. Third, the County unemployment rate which was 10.3% in November. Finally, the national average interest rate of conforming 30-year mortgages, 5.05% as of Christmas. Send your predictions to email@example.com or firstname.lastname@example.org.
Experts who predicted financial disaster and chaos for 2009 got it wrong. Although the crisis is far from over, who would have guessed that the major banks are repaying their bailout loans, Ford and GM are surviving and that the Dow made a 4,000 point run. It could be that a further global financial reckoning is still ahead of us and that the doomsayers are just off on their timing, but I think we are in for more of the same.