The State of the Markets 7/1/09
This post first Appeared in the July edition of Cirios Trends: Getting to the Bottom of the Housing Market
As the infamous summer buying season heats up, hopeful housing market participants are looking for a respite from nearly four years of woe. Reality, however, is throwing a wrench in their plans.
Two trends have recently emerged that are derailing what many hoped would be the strongest summer in real estate since the downturn began.
First, fears about government’s massive debt load and the specter of looming inflation are pushing up interest rates. Despite trillions of dollars dumped into the secondary market for mortgages, rates have risen nearly a full percentage point in the past month. For more on this topic, please read Higher Rates Strangle Mortgage Market.
Second, in response to a lawsuit filed in New York against Washington Mutual, new appraisal guidelines went into effect May 1. The rules, which try to limit collusion between banks and appraisers, are wreaking havoc in the market for new loans. For more on this topic, please read Keepin’ It Real Estate: Just How Bad Are the New Appraisal Guidelines?.
Meanwhile, foreclosure moratoria which expired April 1st were expected to unleash a flood of supply of bank owned homes onto the market. This mountain of new inventory has yet to materialize, as “soft moratoria” are being employed by banks, at the behest of Washington, keeping homes off the market.
In short, its crazy out there. But, amidst the chaos, normalcy is beginning to emerge from the housing market’s charred remains. That is, of course, if you know where to look.
In an environment where prices are careening over a cliff, selling is indiscriminate, fundamentals are thrown out the window and prices move seemingly without regard to logic and all in the same direction: down. The stock market is a great example of this, as during the panics of last fall and this spring, investors sold stocks with both hands; banks, oil refiners, retailers and technology companies alike were thrown out with the proverbial bathwater.
As the chaos recedes, careful market observers look for signs of differentiation. Firms with the best outlook begin to outperform the broader market as investors identify those companies best positioned to emerge on stronger footing. In other words, legitimate recoveries are wrought from opportunistic investors looking for, and finding, value.
Look at the graph at the top of this page, which compares price per square foot of homes sold in San Leandro vs. Albany. No one familiar with the Bay Area would argue the two cities are comparable in anything but BART commute times to San Francisco, but for almost two years, the premium paid to live in Albany shrank to a barely perceptible amount. This isn’t logical, and certainly wasn’t sustainable.
As the housing market heals, fundamentals will once again drive prices. Picking a bottom is a fool’s errand, but looking for relative value is exactly what Cirios Real Estate is here to do for our clients.
Tags: appraisals, Cirios Trends, differentiation, real estate, summer