Last week I had a chance to talk with noted economist Gary Watts. One thing that makes Gary unique is the fact that he is a real estate economist and he has a real estate background. Imagine that, an economist that actually knows something about our industry instead of just another talking suit.
Now a lot of what Gary said you've read here before, but he backs it up with figures and studies from impressive sounding places like the U.S. Treasury, U.S. Bureau of Labor, U.S. Congress, Bureau of Economic Analysis and the like. Much more important sounding than just old Uncle Gino on a rant. And as if Gary's word isn't enough, Time Magazine carried a piece in their February 25th edition entitled "Ignore the Headlines". Folks, when Gene Wunderlich. Gary Watts AND Time Magazine all agree, it's time for you to listen up. 
Here's the scoop. Time quotes famed money manager Peter Lynch talking about the stock market. "When prices are falling, few people have the discipline to buy stocks, houses, gold or any other asset. But those who do pull the trigger excel in the long run." Lynch also gives us his top reason NOT to buy stock right now - and that's if you don't already own a home. In that case, buying a home should be your first priority since an owner occupied home is nearly always profitable (remember, we're talking longer term than 3 months here).
Or to quote John D. Rockefeller, "The way to make money is when blood is running in the streets." I think we can all agree the streets are awash right now.
Time goes on to post a case study about the hazards of waiting. The supposition is that we may be at, or close to, the bottom of the market (with which I concur wholeheartedly). By continuing to wait for that mythical ‘rock bottom', you run the risk of losing your edge. If your timing was that good, Pilgrim, you wouldn't be sitting on your thumbs reading this article right now.
As the market starts its recovery, it is also inevitable that finance costs rise. They quote Jim Svinth, chief economist at Lending Tree saying, "The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher."
So say you get ‘lucky' and prices do decline another 10% by this time next year. But if interest rates tick up even ½%, your monthly payment will actually be higher than if you bought today. Plus you will have spent another year paying somebody else's mortgage in a place that's not your own. Good timing.
- Ignore the headlines. Sure some banks have taken massive write-downs in 2007 - but most have still posted nice profits, continue to generate strong cash flow and pay big dividends (where's the headline on that?). Plus, since the market has already pummeled their share prices, lenders have little to lose by writing off every potential loss like credit cards, business loans, failed mergers, leasing contracts, currency fluctuations and the like. Naturally the media headlines lump all these write-offs as ‘sub-prime loans' but you and I know better. Sure banks will continue to have some write-downs in 2008, but they'll likely be much smaller as the market responds to its correction, not to mention that financial asset write-downs can easily become gains when the market reverses.
You and I also know that financial institutions bundled all types of loans into mortgage backed securities. So as portions of the sub-prime market faltered, investors, especially foreign investors, didn't know what percentage of their portfolio was sub-prime so they panicked and pulled the plug on all their available mortgage funds. With the adjustment to underwriting standards, federal assistance through the stimulus package, long needed FHA and GSE reform and a couple more FED rate drops by summer, you'll see banks, including foreign banks, coming back into the mortgage market in droves. This is simply too big a profit source for them to stay out for long.
- Ignore the headlines.Frequent readers already know that even if the worst-case scenario occurs and 15% of sub-prime loans go south, that leaves 85% of those buyers in their homes with performing loans. You also know that sub-prime and Alt-A loans make up just a faction of the mortgage market. The media will scream that delinquencies for all loans is at an all-time high of 5.9%! But do you know what and when the all-time low was? Hmmmm, that would have been 4% in 4th quarter 2005. Doesn't seem quite so desperate viewed in that context does it? You've also read that notices of default filed in California have surpassed the old record of 61,451 filings set in 1996. But did that article also note that we have over 2,000,000 more homes and condos than we had in 1996? Even when times are good, that equates to a 24% increase in foreclosure activity, all other things being equal. See, you've gotta ignore the headlines, keep it in perspective.
Finally, space prevents me from expanding on the demographics, but you've read them here before. Pent-up demand from the past two years will come back into the market in a big way starting as early as this summer. The half million people who move to California every year while we only build homes for 2/3 of them, they'll need homes. Individual income is up, job growth remains strong, Boomers are looking for our second homes and resort homes because many of us won't just retire to Florida when we hit 65. Our progeny, those Millenials or GenX'ers or whatever those slackers are called, are also getting house hungry. Many are in their 30's now and finally moving out of their parents homes with healthy incomes and savings. Others have driven their parents to an early grave and are inheriting money far in excess of any wealth transfer we've seen in prior generations and they want houses - big, nice, comfy houses much better than what Mom & Dad slaved for.
- Ignore the headlines.Get the facts and make smart decision. Remember, don't get your priorities all bass-ackwards. Don't wait to buy real estate, buy real estate and wait.
Gene Wunderlich - Selling Southwest California Homes including Murrieta, Temecula and the Southern California Wine Country.
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