12 Housing Themes for 2012

As 2012 rumbles out of the gate, the US housing market correction enters its sixth year. By all accounts, it’s been the worst real estate slump in generations. But even this far into the cycle, housing bears continue to troll through data releases looking for ominous warnings that vindicate their view that homebuyers and investors alike should shun real estate. They have a point, but record foreclosures, bloated inventory and home price declines are anything but news.

They are also missing the point entirely: The time to be bearish on housing was in 2005, not 2012.

For those not in the market, who get their color from the blogosphere and headline-selling financial press, the housing market is a mess: Foreclosures persist, unemployment is high, Europe is in turmoil, growth in China and the other BRICs is slowing and banks are doing their best to avoid giving out loans. And that’s all true.

But come December when we look back at how the housing market fared in 2012, this will not be a year remembered for how bad it was, but for how bad it wasn’t. Over the course of the six year housing correction, immense amounts of risk have been bled out of the market to a point where, in general, opportunities for good investments outweigh the risk of further losses.

Below are 12 themes for housing in 2012, and while not all represent rosy optimism, they support my continued view that housing bears are seven years late to the party. And while bulls may be early, the good ones always are.

1. Bottom Calling
All of a sudden its cool again to call the bottom in the housing market. Already, some prominent pundits and analysts have said 2012 will mark housing’s nadir. Goldman Sachs came out with a report in December predicting that the widely-watched Case Shiller Home Price Index would slip in 2012 but find a bottom. Optimism that Goldman’s forecast will come true should be tempered, however, since real estate website Zillow — a company built primarily on providing consumers misleading information about their home’s value — recently published a report of their own pointing to 2012 as housing’s low point. And remember, in 2009, 2010 was supposed to be the bottom. Then it was 2011. Midway through this year, if housing remains weak, look for those bold analysts to backpedal, finding unforeseen circumstances that rendered their predictions null.

2. Robo-signing hangover, cured?
This time last year, the housing market was holding its collective breath as the robo-signing scandal broke, revealing shoddy foreclosure processes, first at Ally Bank (formerly GMAC), then Bank of America, JP Morgan Chase and nearly all the country’s biggest lenders. The repossession machine ground to a halt, resulting in limited supply of new foreclosures coming to market. Banks scrambled to “investigate” their procedures, uncovering a litany of practices that were sloppy at best, illegal at worst. Even firms like Lender Processing Services, which provides back office support and services to the mortgage industry, got wrapped up in the scandal. As a result, foreclosures virtually ground to a halt in 2011, which helped prop up prices up in the first half of the year. In many areas, price declines accelerated into year-end as banks resolved their robo-signing issues again and restarted the foreclosure machine. 2012 looks to be another year heavy in foreclosures, but with hoards of cash buyers looking for distressed properties, it will take a true deluge of inventory to overwhelm pent up investor demand.

3. Geopolitical Uncertainty
The world is a mess. The list of geopolitical tinderboxes that could catch flame at any moment is too long to reprint here. Suffice to say, every asset class on investors’ menus is laced with risk, many of which have little to do with the fundamentals of the investment itself. And with risk at all-time highs and returns on savings at all-time lows, steady, cash flowing assets are starting to be seen as more attractive than they are boring. This flight to quality is one of the reasons cities like San Francisco, New York, Boston and Washington have seen investors flock to their Class A properties. A world where demand dries up in midtown Manhattan or downtown San Francisco is an ugly world indeed, and many view real estate a safe “as long as the world doesn’t completely implode I will be OK” bet.

4. Foreclosure Rental Program
The latest in a string of Washington-directed solutions to the housing market’s woes is the turning of millions of foreclosed homes into rentals. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, received over 4000 proposals after requesting ideas on how to structure its program to rent foreclosed homes. All the big players tossed their hats into the ring, in additional to financial firms like Fortress Investment Group, Deutsche Bank and Barclays Capital. With rents rising and home prices falling, regulators and politicians alike think they may have found a way to not only keep bank owned homes from pushing home prices down any further, but earn a couple bucks in rental income in the process. And while major lending institutions are playing ball to show they don’t relish in kicking Americans out of their homes, the logistical challenges to managing nationwide rental programs are, in a word, significant. Time, and data on actual REO homes turned into rentals will prove out just how successful the initiative ultimately is, and how much of it is political fluff.

5. Return of alternative lending
So-called “exotic” lending during the boom was one of the chief culprits in the housing market’s eventual collapse. But to think that alternative lending has no place in the market is plain ignorant. Through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), government-backed mortgages – and their strict guidelines – dominate the current market for home loans. But increasingly, small originators are gaining market share by offering more flexible loan products. No one will call the loans “Alt-A” or “Subprime,” but that’s exactly what they are. But from the guidelines my firm has has seen, underwriting is far more reasonable and responsible than it was during the boom. Good borrowers with dinged credit or alternative income situations have been locked out of the mortgage market since the crash – bringing them back in will be a positive headwind for housing in the coming years.

6. Multi-family momentum
The hottest sector in real estate right now is multifamily. It seems like everyone wants to buy apartment buildings, in particular in coastal metro markets where rents are going through the roof. Cap rates have compressed to levels not seen since the market’s peak, interest rates are low (although loans are still a challenge to get funded) and money is pouring into the market. In Class A markets like San Francisco and New York, competition is heated for big buildings. But with smaller investors still reeling from the downturn, the small building market (5-20 units) is still awash with opportunities. Strong demographic trends (more below) that favor the rental market lead us to believe that apartments are hot for good reason, and should stay that way for the foreseeable future.

7. Foreign Investors
An often overlooked reason why housing is unlikely to fall off another cliff any time soon is the extent to which investor demand for distressed assets dwarfs supply. This is true for rundown duplexes in Oakland and Manhattan high rises alike. And within that world of buyers stalking the market for deals, a surprisingly large percentage of all cash buyers have names most Americans would have trouble pronouncing. To wit, in the past six months, 19 of the 20 cheapest homes in San Francisco were purchased by buyers of Asian descent. The money keeps pouring in, be it from wealthy foreign businesspeople looking favorable the tax treatment our government gives direct investment, speculators yanking money out of the rapidly cooling Chinese market or Canadian “snowbirds” picking up a desert spread on the cheap in an exclusive Scottsdale development. Our housing market is far from fixed, but when investors look around the world at their asset class options, the US real estate market is benefiting from being best in show at a really, really lousy show.

8. Hazy Future for Fannie and Freddie
Remember Fannie Mae and Freddie Mac? Those little government-sponsored entities no one outside the arcane world of mortgage finance had heard of until they blew up sky-high in September 2008? Since that time, the two companies have needed nearly $200 billion in capital to make up for losses on mortgages bought or insured before the market collapsed. Since Fannie and Freddie were put into federal conservatorship, regulators, market participants and lobbyists have squared off over how to reshape the federal government’s role in housing. Most experts agree that the housing market cannot become truly healed until there is resolution on this issue, and with 2012 being an election year, few expect meaningful progress on this complex, hotly debated issue. (For more on the history of government involvement in the housing market and how the real estate lobby shaped federal policy to support homeownership at all cost, check out my recently published e-book: “Homeownership at Any Cost: How the National Association of Realtors Convinced Taxpayers to Subsidize the American Dream.”)

9. False Election promises of a Silver Bullet
Notably, housing was absent from even the most economically-focused Republican primary debates. Unfortunately, politicians have little to gain by proposing bold steps to fix the housing market, primarily because no such bold step exists. Some programs have been more successful than others, and certain ideas to improve the market have more merit than others, but “solutions” that tap into federal funds are attacked from the right while those that aim to remove barriers to foreclosure receive equal scorn from the left. Trying to fix the housing market at this point is a bit like happening upon a beached whale, long since dead and starting to reek, and pulling out a garden house.

10. FHA Shortfalls
Google “FHA is running out of money” and the first articles that pop up are from 2009, when concerns first surfaced that the Federal Housing Administration, or FHA, was running short of cash. Unlike Fannie and Freddie, who purchase actual mortgages, the FHA provides mortgage insurers that protect lenders in the event borrowers stop making payments. FHA loan guidelines are strict in many ways, but loose on credit and allow tiny down payments in order to provide finding options for low-income or credit-impaired home buyers. FHA squashed rumors of financial troubles in 2009, but concerns were raised again late last year when an independent auditor found that there was close to a 50% chance the FHA would run out of money and require a federal bailout. If FHA is indeed forced to go hat in hand to Washington for cash, the chances of such a request being well-received are, to say the least, somewhere squarely between slim and none.

11. Private Securitization Market Remains Stalled
Since the mortgage-backed securities market’s zenith in 2005, when according to the Securities Industries and Financial Markets Association issuance peaked at $740 billion, the market for private-label securities (those not backed by the US government via Fannie Mae and Freddie Mac) has plunged 99%. But ever since the boom’s big issuers like Goldman Sachs, Morgan Stanley and UBS all but shuttered their mortgage desks, they have been biding their time to when such securities were once again economic to create. Ratings agencies, namely Standard and Poors and Moodys, have altered their models such that issuances are no longer profitable, so precious few new securities have been issued. Redwood Trust, a California-based mortgage investment company, is one of the few firms doing new issuances and all have been of the jumbo variety. Even though others would like to follow in Redwood’s footsteps, until the regulatory landscape becomes far clearer, few will.

12. Housing demographics of young people
After peaking at nearly 70% in 2004, the US homeownership rate has tumbled to around 66%, a level not seen since 1998. Young owners, in particular, have been hardest hit. According to demographer Cheryl Russell, homeownership among 30-34 year olds is falling faster than any other age group: A loss of middle class wealth, student debt loads and uncertainty about the future are just some of the reasons young people are shunning homeownership. Couple that with trends towards transience and a general movement towards smaller spaces and city-centers, and the outlook for rentals starts to look pretty good. It’s no mystery why the real estate investment community can’t get enough of multi-family.

To call the US housing market anything but distressed would be foolish. But to mistaken a distressed housing market for one to avoid would be even more so. And so we plunge, headlong into 2012: Good luck out there.

Is 80 the new 60? Retirement A Distant Hope for Most Americans

“More than three quarters of middle-class Americans [say] they don’t think they’ll be able to afford to retire until they’re 80.” – Recent Wells Fargo survey

“Most investors for the next several years will be lucky to get a 5% return in their portfolios thanks to the growth-constricting debt problems in the US and Europe.” – Bill Gross, Pimco Investments

Really??

Whether you pay attention to the stock market, invest in real estate or just live in the United States, the above statistics should be reason for pause. What has happened in this country, both economically and socially, that our so-called middle class has such dour expectations for the golden years?

With inflation running close to 4%, that 5% return is more like 1%. Ugh. Unless 80 is the new 60, retiring 40 years after going over the hill doesn’t sound much like the life we were promised way back when.

We’re taught in school to sock away money in the stock market, which over time always goes up. That as long as we save a little bit every year, when the gray hairs take over and the body starts to give out, we should have plenty of money to hang up the suit and call it a life, easing into our final years in comfort and style.

So what if that was all a lie? What if decades of “growth” and “prosperity” were really just artificial asset appreciation fueled by cheap and easy debt? What if our generation really has to work until we’re 80?

It’s easy to see why young people are camping out, risking arrest and taking a stand against a system they no longer believe in. You don’t have to agree with the Occupy protesters to recognize that our country has some serious long term problems that need to be addressed, and fast.

But what does this all have to do with real estate?

Everything.

It is no accident that if there is a single theme in the real estate investment world right now it’s that there is far more money looking to buy real estate than there is real estate to buy. Price, of course, remains the arbiter of a good deal, but well-priced opportunities are getting bid up from San Francisco to Sacramento. Maybe real estate investors are overly optimistic and it will all come crashing down, again. But maybe not.

Maybe the world has woken up to the fact that trusting Wall Street is a lousy way to retire, and that cash flowing real estate may be the safest bet there is in a world where even death and taxes may no longer be sure things.

2012 is sure to be another whacky ride in local real estate markets. And while we aren’t predicting runaway appreciation to kick in, certain cities seem poised for fundamental strength and continued improvement. These are five cities worth watching in the coming year, along with price trend graphs that shed some light into where we’ve been, where we are and where we may be going.


Redwood City (94061)
Affordable is a relative term on the Peninsula, but Redwood City is at the top of the list when affordability is crossed with desirability. With near perfect weather and proximity to job centers going for it, the only thing that has historically kept back Redwood City home prices has been mediocre schools. But with young families looking for a cheaper living option, this could change in the coming years (and decades).



Potrero Hill, San Francisco (94107)
“The Hill” as locals call it, is a suburban paradise just minutes from downtown San Francisco. Easy freeway access, quiet streets and big houses with bigger views has made Potrero one of the tightest real estate markets in the entire city. The recent price trend reflects this fact. And with the ongoing development of Mission Bay and SOMA, along with gradual improvement of the Potrero housing projects, The Hill has a lot of positive fundamentals going for it. Not to mention it’s also the location of Cirios Real Estate.



San Carlos (94070)
If you were to rank school districts in San Mateo County, then put them in reverse order according to home prices, chances are San Carlos would be at the top of the list. “Affordable” by Peninsula standards, good schools, an up-and-coming downtown and an easy commute to San Francisco and Silicon Valley, San Carlos is increasingly becoming a popular choice for buyers armed with freshly minted social media dollars.



Antioch (94509)
Ground Zero for local foreclosures, Antioch has one of the most active distressed property markets in the Bay Area. But are there enough buyers to go around? Home prices have been flat – at best – since the market bottomed in 2009, and with a weak job market and steady stream of REOs coming to market, it’s anybody’s guess when Antioch gets back on track.



Mountain View (94040)
If there is a single city at the center of current wealth creation in the Bay Area, it has to be Mountain View. Home to Google and a host of other tech companies, Mountain View is Silicon Valley’s beating pulse. Facebook, while headquartered in nearby Palo Alto, just announced plans for a spring 2012 IPO. And regardless of what you think of Facebook, social media and Web 2.0, if you don’t think that single event won’t shift Bay Area real estate markets, you aren’t paying attention.

Housing Ignored as Occupy Movement Takes Center Stage

Last Wednesday, we learned that Europe’s leaders were prepared to make bold pledges, promising to end the financial crisis that’s been haunting the EU for almost 18 months. Over the weekend, investors shrugged, as if to say, “What’s new?”

Indeed, not much material has changed since last week, and a sharp selloff in global equities Monday reminded us that all is not yet well in Europe and, by extension, the rest of the world economy.

October 2011 will also be remembered as the month the US woke up to the fact that the Occupy movement is more than just a gathering of disgruntled anarchists and hipsters in lower Manhattan. In Oakland, protests turned violent as overzealous riot cops landed an Iraq veteran in the hospital with a serious head injury. In thousands of cities across the country, mostly young, despondent activists are taking to the streets, demanding … well, it’s not really clear what they’re demanding but it is pretty clear they’re unsatisfied with the political and economic status quo. As winter moves in and cold temperatures thin the protestors’ ranks, the mettle of the movement is sure to be tested.

The housing market, once center stage in economic blogs and the financial press, has taken a back seat to sovereign debt, youth unemployment data and student loan forgiveness.

Late fall in San Francisco, in addition to reminding us why California weather trumps pretty much everywhere else on earth, marks the tail end of our Indian Summer buying season. Listings flood the market after Labor Day and buyers hit the Sunday open house circuit. By the end of October, most of what will sell has sold, and the remaining, now-disgruntled sellers are left to either cut price and sell before year-end or lick their wounds until the spring. It’s a good time to be picking off motivated sellers.

All over the Bay Area, the rental market continues to defy predictions that it will cool down. Nationally, developers are breaking ground on multi-family projects, even as shovels ready for single family developers sit idle. Positive demographics trends, tight underwriting guidelines and a general shortage of affordable, high quality housing is making live easy for landlords. Not so much for tenants, as vacancies are drawings swarms reminiscent of the dot com days.

Foreclosures, still trickling out, continue to weigh on distressed markets and keep a lid on appreciation in stronger areas. As election season kicks into high gear, expect to see housing re-enter the discussion, as candidates (and incumbents) pander to their various constituencies with foreclosure prevention, modification and refinance schemes that are, still, politically motivated and economically untenable.

The housing market, despite historic cross-currents in both market and political forces, has become downright stagnant. And here we are likely to stay, blips and bumps, pockets of strength, false starts and false bottoms, as we bounce along the painful, artificially extended, road to recovery.

Amidst a deluge of recent events that foretell a second round of financial crises, home price data has been oddly sanguine. In the past week, excerpts from headlines on HousingWire indicate that the housing market may actually be in better shape than the economy at large:

“Phoenix home sales hit highest August level in five years”
“Housing has hit bottom…”
“Las Vegas August home sales at five-year high”
“Fixed mortgage rates hit all-time low”
“Massachusetts home and condo sales increase 15%”

According to the widely watched S&P Case Shiller Home Price index, despite being lower now than this time last year, home prices have actually risen for the past four months.

So what gives? How, in an environment where Europe is seemingly in shambles, unemployment remains stubbornly high and a recession redux looms, can the housing market be anything but abysmal?

There are three primary explanations for housing’s recent strength. Notably however, markets remain choppy and confused, as broad trends continue to mask movements going on at a local level.

First, recent positive housing data have come in the historically strong summer months. Real estate market activity is notoriously seasonal, a pattern well-known to housing economists. Journalists however, the ones who write the stories that the public reads, may not understand how to detect seasonality in data. When reading about housing data, always look to make sure seasonality is accounted for, lest strong summer data could mislead some into thinking a more fundamental recovery is underway.

Second, investor activity in the market remains high. Foreclosure inventory is tight thanks to knock-on affects of last fall’s robo-signing debacle, and limited supply is buoying prices. Sales volume is brisk, as all-cash buyers snap up what distressed properties do come to market (so long as they are priced right of course). Volatility on Wall Street is also perversely benefiting housing, as investors seek out less risky assets. Ironically, real estate is now starting to be seen as a low risk investment, at least on a relative basis when compared with stocks.

Third, a combination of persistently low (and getting lower) interest rates and high (and getting higher) rents, is making home ownership an increasingly more appealing option than renting. Buyers still have to qualify for a loan, but if they do, they are well-rewarded. And in cities like San Francisco and New York where rents are skyrocketing, buying is starting to look better and better.

But despite all this, all is not well in the housing market. Risks persist in both the near and long term. As long as the job market flounders, a sustainable recovery for housing will remain elusive. Current interest rate policy is both a blessing and a curse. While rates are low, a promise from the Federal Reserve to keep them that way for the foreseeable future means there is little urgency to act now to take advantage of the cheap money.

And then of course there is Europe. Financial markets are being held hostage by European policy makers, a group The Economist calls “spineless,” and their feeble attempts to contain a spiraling sovereign debt crisis. It’s not that much better here in the US, as European and American lawmakers appear engaged in a daily battle of who can legislate more ineffectively.

Predicting housing’s next move is difficult, at best. Crosscurrents, both politically and economically, continue to make this the most confusing housing market since the downturn began in 2006.

An epidemic is loose in this country. And it’s getting worse, infecting all aspects of our economy. It’s as insidious as it is misunderstood, passed off by the mainstream press as just another economic benchmark to focus on, then immediately ignore.

The name of this epidemic? Uncertainty.

It’s really the only piece of economic data that matters, because the more uncertainty there is in the world, the less confident people are about the future. Waning confidence begets indecision, which begets economic stagnation, which begets more uncertainty. It’s no coincidence that consumer confidence measurements are highly correlated with the business cycle.

Last week, the University of Michigan, in its widely watched monthly assessment of consumer confidence, found that the American public is as downbeat about our economic fortunes as it has been in the past three years. Yesterday, the Confidence Board’s August consumer confidence survey registered the lowest reading since December 2007.

Way back then, Lehman Brothers was still a company. Washington Mutual still wrote loans and Merrill Lynch gave out economic advice.

Think about that for a second. Since June, wrangling in Washington over the debt ceiling, S&P’s downgrade of the United States’ credit rating and, most recently, renewed predictions that our economy may already be in recession (again) have pushed the country into such an emotional tailspin that we now think things are worse than before, during or immediately after the financial crisis.

So why does this matter, and what does it have to do with real estate?

First, since low readings on confidence are highly correlated with recessions and most economic data are notoriously backwards looking, confidence is often the best real-time measurement of how close we may be to recession, or how robust an economic expansion (remember those?) may be.

Second, confidence drives individual decision-making. Economies are made up of billions of unique decisions, each determined by a host of factors. Chief among them is how secure individuals are about how their actions may impact the future, both short- and long-term.
Housing is a perfect example. The more confident you are that you won’t lose your job, or may even be in line for a promotion, the more likely you are to buy a bigger house or go forward with that remodel project. Less certainty about your job prospects makes it more likely that you will stay put, downsize, or continue renting.

So when people ask us about the housing market, or where interest rates are headed, or whether they should keep renting, the answer is simple, and it happens to be in the form of a question: “How certain are you about the future?” The more certain you are, the more confident you are and the better you can predict how actions you take now may impact the future. More confident actors take more risks, which drives economic activity. Less confident ones shun risk, hunker down and economic growth dries up.

So as long as uncertainty reigns, our economic prospects are bleak. The caveat, of course, is that recessions typically end just when confidence is as its worst. So it goes.

They say the US real estate market sucks. They say housing is in for more pain. Not everyone is listening.

Here are the top 5 highest priced San Francisco condo sales thus far in 2011, as measured by price per square foot.

765 Market St., #27A
Sold for $7,200,000 or $2,170/sqft on May 10, 2011.
3 beds, 4.5 baths, 3,318sqft
You may have heard of a little hotel chain called the “Four Seasons.” With expansive views and high-end finishes, this 3,000+sqft condo includes custom furniture and the pampered lifestyle one can only find at the Four Seasons. Oh, and the buyer paid cash. No big deal.

765 Market St., #32F
Sold for $4,350,000 or $1,689/sqft on February 16, 2011
2 beds, 2.5baths, 2,576sqft
Another Four Seasons property, this corner unit is smaller than its big brother listed above, but no less spectacular. A “steal” at just under $1,700/sqft

1045 Vallejo St
Sold for $4,100,000 or $1,715/sqft on May 12, 2011
3 beds, 2.5 baths, 2,391sqft
Away from the steep streets and cable car lines, this urban sanctuary is truly unique. Sold for $150,000 above list, this 2-level luxury condo has spectacular city views, an elevator and two fireplaces. Monthly HOA fees are a mere $2,560. Oh, another all-cash transaction.

425 1st St., unit 6004
Sold for $2,427,308 or $1,548/sqft on March 31, 2011
2 beds, 2 baths, 1,568 sqft
You may know it as that eyesore you almost run into coming off the Bay Bridge. Others call it home. One Rincon Hill is a condo before its time, finished at the height of the housing boom in 2008. This top floor, penthouse unit is a mere 1,568sqft but boats truly breathtaking views. But for $1,548 per sqft?

765 Market St., #22D
Sold for $3,700,000 or $1,441/sqft on March 15, 2011
3 beds, 3.5 baths, 2,567sqft
The agent for this property (who represented both buyer and seller for a cool $185,000 commission) must have quite a sense of humor. She noted on the listing: “Price Reduced! Now at affordable $1,539/sqft.) San Francisco: You just can’t make this stuff up.

When this month’s Cirios Trends goes to ‘print,’ we will be less than 24-hours from the looming August 2nd deadline for raising the US government’s debt ceiling or, by all accounts, suffer financial Armageddon. To try and estimate the market’s reaction to this event is, at this point, impossible. So with that, back to what we know.

As we enter the summer doldrums, signals are mixed. Interest rates remain at historic lows, but sentiment continues to be weak. Uncertainty regarding the debt talks in Washington is adding to a more general concern that the economic outlook is rather bleak. It seems that unless you’re a computer programmer in Silicon Valley its nigh impossible to find a job. New York financial firms just announced another round of layoffs, even Cisco is cutting jobs and recent corporate earnings reports have been less than upbeat about the business environment.

Abroad, things don’t look much better. Greece and the rest of the so-called PIGS (Portugal, Ireland, Greece, Spain) are dragging Europe deeper into a morass of bloated governments and citizens who may have gotten a bit too comfortable on the government dole. China is teetering, scrambling to control runaway property prices as food inflation takes its toll at checkout counters worldwide. Ugh.

So, back to housing.

How much does all this matter? Why do food prices in rural China matter to someone looking to buy a home in Rockridge? The short answer is that in the near term, this continues to be a sentiment driven market. When the headlines are ugly, buyers are staying away. And when demand dries up, sellers get skittish and start lowering prices. And when prices start getting dropped, buyers smell blood and hold out for even better deals. Its a vicious cycle that plays out in neighborhoods all around us.

But analyzing housing and the future of real estate is more about home prices. And after all, most of us making real estate decisions with a longer outlook than the next few months. Would that our elected leaders could have a similarly “long term” outlook. But we digress.

Fewer buyers in the market mean more renters. And more renters in the market, particularly, somewhere like the Bay Area where rental inventory is limited, means higher rents. Indeed, rents have been rising here for the better part of the last 12 months. It should come as no surprise then that investors have started snatching up apartment buildings. REZ, an exchange traded fund tied to residential real estate investment firms, is up over 300% since its low in 2009.

All of that is to say that despite persistent bad news, opportunities continue to present themselves. There are risks to be sure, but ask any seasoned real estate investor and they’ll tell you that the smart money is buying when everyone else is scared. Are you scared? If so, call Cirios and let’s make a deal.

The US housing market has become downright schizophrenic.

In the same week that the pending home sales report (measuring new signed purchase contracts) showed a pop in sales during May, mortgage applications dropped despite record low interest rates. Home prices in many areas have hit new lows since the market began correcting more than five years ago. Other markets have experienced a legitimate recovery, with prices pushing higher even against the backdrop of a sluggish economy.

A quick look at the graph below shows how this dynamic is playing out here in the Bay Area. Burlingame is considered one of the most desirable cities in the area, with excellent schools, good weather and a (relatively) easy commute to both San Francisco and Silicon Valley. Daly City, while an affordable enclave in San Mateo County, suffers from just average schools and poor weather. Still a desirable place to live, Daly City certainly has less going for it than Burlingame.

As the market rose from 1999-2007, the two markets moved nearly in lock step. Then as housing began to crumble in 2007, prices fell much faster in Daly City than they did in Burlingame. The red box captures 2009-June 2011 and is shown in the subsequent graph.

The arrows point to mid-2010, just after the homebuyer tax credit expired. Daly City took a quick dive down and has muddled along in the year since, as prices have slipped 13% in the past 12 months. Burlingame, on the other hand, has risen steadily during that time and prices are up 7% in the past year. These two cities are a mere 12 miles apart, but could not have had more diametrically opposed housing market conditions over the past year.

Essential to understanding how local markets are behaving and how they are likely to behave in the future is the extent to which foreclosure inventory is looming and may come to market, pushing down prices. Estimates vary, but current data on mortgage delinquencies and foreclosure starts put the number of distressed mortgages which could become foreclosures somewhere around 6 million. At the current processing rate of around one million per year, that means a meaningful level of foreclosures is likely to persist for at least five more years.

Continued efforts to promote short sales and loan modifications will have an impact on these figures, but they are likely to make the problem only slightly less bad. But remember foreclosures do not drive all markets, so it’s still important to look at distressed housing data in a granular level.

All this leads us to the view that for the foreseeable future, housing will chop along. Fundamentals matter, as more desirable markets will outperform less desirable ones. While seemingly an obvious conclusion, it indicates that slowly, markets are healing. That said, many risks remain. Lending conditions continue to be tight and are getting tighter, the economy is still sputtering in much of the country and there are growing concerns that recent fanfare over social media IPOs could be the next bubble in the making.

Confusing? Yes. But here in Bay Area real estate, we absolutely do not do boring.

Its official: The housing market has reached a new low. According to the widely watched Case Shiller Home Price Index, home prices are now at the lowest point since the slump began some five years ago. Weighed down by foreclosures, sluggish hiring and a tight lending environment, the US housing market, we are told, is in dire straights once again.

Interestingly, however, this now-popular narrative contradicts what many home buyers are experiencing in the trenches. If housing is faring so poorly, why then are so many homes selling above asking? Why did the property our company just listed in Salinas, a town where the economy is anything but strong, get 16 offers in the first week of being on the market? Why is the phone ringing off the hook with buyers stumbling over themselves to buy a $2 million property … with cash?

The answer to these apparent curiosities within the marketplace is not easy to find. Look at the market as a glass half full and it seems like a great time to buy a home. Prices are down, mortgages rates are low (really low!) and don’t they always say to buy when there’s blood in the streets?

But take the more pessimistic view and renting seems like the only prudent way to live. The broader economic outlook is shaky, at best, with high commodity prices, mini sovereign debt crises popping up every week and geopolitical tensions that seem poised for some dramatic crescendo, as if what we’ve witnessed this spring in the Middle East and North Africa have simply been a warm-up.

Confusion is king and likely to reign for the foreseeable future.

Our advice to buyers, in particular those with time on their side, is to be patient, be picky, but don’t be stubborn. We believe the worst of the price declines are behind us, not in front of us. In the Bay Area, our diversified economy and wealth of innovation has helped insulate our job market, and by extension our housing market. There has been pain, to be sure, but we have a lot more fundamentally going for us than many parts of the country. Opportunities are presenting themselves, and every once in a while a house comes on the market where paying list is, actually, a good idea.

But risks remain, both on a micro and macro level. It most certainly is not a time to be overpaying, no matter how perfect a house may be. Emotions, they say, are the enemy of good traders. So too should emotions be considered an enemy of the savvy home buyer. Consider the economics, both near and long term, of any housing-related decision you undertake.

And, as always, if you don’t know how to take the next step, or what the next step even is, give us a ring and we’ll set you down the right track.