This is a long email article but a terrific read for all of us! Some of the info is a bit old since it was written a couple of months ago but the meat of this thing is great. Let us all be the leaders with our customers and clients, not the talking heads on TV!
The Real State of Real Estate
Presented by: Gary Watts - Real Estate Economist, California Previews Retreat
Monterey, August 2007
Brief History of Real Estate
Historically, housing downturns average 27 months. We are in the 23rd month of the current downturn, so
once we are past this financial over-reaction, things should improve. The national median price of a
resale home is 3.4% higher than a year ago and the pending sales index is moving back up. There may
just be some light beginning to shine at the end of this tunnel!
1970 to 1980
Prior to my entering real estate in 1971, a quote appeared in Business Week (late 1969) due to an increase
in housing prices: "The goal of owning a home seems to be getting beyond the reach of more and more
Americans. The typical new house today costs about $28,000. "In 1972, interest rates were 7% and it
would take over 24 years before a home buyer could be able to obtain those low rates once again - today,
we are in the low 6's. In 1973, banks had a run on deposits and for a period of approximately 8 months
there were no lenders who were in a position to make loans to home buyers. This should have caused a
collapse in the real estate market, but home prices continued to rise. In 1977, the National Business
magazine stated: "The median price of a home today is approaching $50,000. Housing experts predict
price rises in the future won't be that great."
1980 to 1990
At the end of the 70's and into the 80's, inflation hit 21.5% and home loans were reaching 18%! This was
followed by a crash (and later bail out) of the savings & loans industry in America. Although large job
losses were creating foreclosures, home prices continued to rise. By 1985, Money Magazine made this
prediction about home prices: "The golden-age of risk free run-ups in home prices is gone."With a buildup in
defense spending and huge growth in manufacturing sector in the late 1980's, increased job creation led to a
boom in home construction and home prices continued to rise. Then on November 11, 1989, a dramatic event
took place: the Berlin Wall came down! With the Evil Empire (the Soviet Union) breaking up, things were going
to change around the world and change quickly!
1990 to 2000
In early 1990, Congress began slashing funds for defense spending. Within a very short period of time, a
lot of highly paid workers in both defense and manufacturing had lost their jobs. California home prices
declined about 12% by 1996 when the San Francisco Examiner said: "A home is where the bad
investment is. "In the following 3 years, California home prices rose 19.7% wiping out all the losses of
the early '90's and ended the decade with a net gain of 9.35%. The median price in California has not
declined since 1996.
The Media
Today's media plays up bad economic news now more than ever, which leads to misconceptions about
economic realty. Our economy is extremely strong, profits are superb and the world economy is
exploding.
* All you read and hear is that real estate is going down, yet last month, prices in the U.S. rose
3.4% from a year ago and California is up almost 1%. The Bay Area prices have gained 4.1%
over the last year and southern California median price is up 3.7%.
* Foreclosures are supposed to be at a record high - but last
year 98.83% or mortgages did not go to
foreclosure. Today, the Bay Area's foreclosure rate is up only 1.5% over last year while southern
California's foreclosure rate is up 2%.
* The media reported 53,942 notices of default for the 2nd
Quarter - a near record high. They are
comparing it to the 1st Q. of ‘96 when 61,541 notices were filed but fail to mention that 2 million more home have been built in California since then!
* What if the media's headlines read: 99.2% of Mortgages are Not
in Foreclosure? The media and the financial markets have greatly over-reacted, to the real problems that have been revealed in the lending marketplace, which is typical.
The Sub-Prime Market
It may surprise you to know that sub-prime loans make-up only 5% of the U.S. total loan market and Alt -
A loans (those with credit better than sub-prime but less than prime) total only 8% of all loans in the U.S.!
1. These exotic loans became a major influence in the early 2000's, but anyone obtaining them up through
2004 had very few problems due to rapid equity growth. Many with no-money-down purchases soon
found they had 20% (+) equity within a year or two!
2. Most of the problems with sub-prime loans originated in the summer of2005 through 2006. In
California, 43% of all loans funded during that time were sub-prime loans.
3. Sub-prime loan investors that needed to sell their loans were liquidating their paper for $.96 on the
dollar. There has been no current data on sales since August 5th, but with the current turmoil in the
financial markets, I am sure they are being "dumped" for less.
4. Here is a financial report on some of the banks that provided the sub-prime money:
• Bear Stearns 2nd quarter revenue was $2.512 billion - a new record!
• Merrill Lynch saw 2nd quarter profits rise 30.2% Morgan Stanley (holding $5.2 billion in subprime
loans) had a 60% jump in earnings.
• Goldman Saks earned $2.33 billion in the past year.
• Bank of America (#2 U.S. bank), after putting aside $1.81 billion for potential credit losses, saw
net income rise to $5.76 billion - up from $5.48 billion last year.
The media will still report about massive delinquencies and huge foreclosures in the sub-prime market,
but those reports will not be accurate because they don't explain the difference between a delinquent
payment, a notice of default or a foreclosure. They tell us "Foreclosures at Record High!" but that is not
accurate.
I hope was helpful for all of us...
Source: Mortgage Bankers Association, National Homebuilders Association, Inside Mortgage Finance
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