| As I have been a Realtor for many years, I am | | | | be rated by rating agencies. The rating agencies |
| constantly receiving information that is directly related | | | | looked at the tranches between 1997 and 2005, when |
| to the housing industry. Most of the time it | | | | there were almost no default losses, and concluded |
| predominates the State of California, but frequently | | | | they were safe. Problem is, we had no history of |
| includes what is going on in the rest of the country. | | | | observing what these people looked like or their |
| In my most recent Real Estate magazine there were | | | | default behavior. |
| a number of articles that discussed the housing market | | | | Second, there are a couple of problems between |
| and where we stand and how long it is expected to | | | | borrowers and lenders, including the nature of |
| remain in a downward slope. Additionally, I have | | | | disclosure. Does the typical borrower really understand |
| attended numerous seminars and conferences and | | | | the HUD-1 form? But on the flip side, which borrowers |
| they have all indicated that the slow market is | | | | are going to take on a 2/28 loan? (2 years 4 months) |
| expected to remain until the latter part of 2008. | | | | Speculators. If the value of the house goes down, you |
| A panel of major economists spoke at a discussion | | | | walk away. |
| aptly called "Up, Down, or Sideways: What's Next for | | | | Finally, originators and investors. Originators have an |
| California's Housing Market." These economists were: | | | | incentive to originate, thereby creating a lot of moral |
| Frank Nothaft, chief economist for Freddie Mac; | | | | hazard based on compensation. The don't have an |
| Richard Green, Oliver T. Carr, Professor of Real | | | | incentive to do quality control on the kind of loan that |
| Estate Finance at The George Washington University; | | | | they're selling to Wall Street. The mystery is why Wall |
| and Kack Kyser, chief economist with the L.A. | | | | Street didn't understand this. |
| Economic Development Corporation. | | | | Right now, we are outside the economic models. |
| Richard Green indicated that the economy as a whole | | | | Anyone who thinks he knows when issues will be |
| if fairly healthy, but the housing market is not. The top | | | | resolved is deluding himself. The bottom line is the key |
| states for negative-amortization purchase loans in | | | | statistic you should watch is the months' supply of |
| March 2007 were California (number two) and Florida. | | | | homes available for sale. When that number starts |
| These loans count on house prices going up faster | | | | shrinking, the bottom is coming. Until that number starts |
| than inflation. | | | | shrinking, you don't know when it's coming. |
| The good news is that loans that are fundamentally | | | | Some Hot Metro Areas |
| sound will still be fundamentally sound. Wall Street | | | | The "animal spirits" are back in San Francisco and San |
| doesn't understand this, and it's important to the | | | | Jose. Technology is back and Biomed is performing |
| housing recovery for Wall Street to understand this. | | | | strongly. They are looking at about a 2.3% growth in |
| That's why it's also important to understand that | | | | jobs in San Francisco Metro area this year and about |
| California has among the highest prepayment rates in | | | | 2.1% next year and in San Jose, 2.1% this year and 2% |
| the country. California's housing turnover rate is not | | | | next year. That will help increase the housing market. |
| particularly high, largely because of Proposition 13. As | | | | Los Angeles County has been insulated from some of |
| for subprime mortgage delinquencies, there are | | | | the lows of the housing market. Expect a 1.5% growth |
| pockets of California-Stockton, Fresno, San Bernardino | | | | in 2008. |
| County and Riverside County where this is a real | | | | Several other markets throughout the United States |
| problem. Overall, as a state, it doesn't rank among the | | | | will be showing similar trends with certain areas |
| states with the worst rates of subprime delinquencies. | | | | growing faster than others, but on the whole, we |
| It's important to make a distinction here between | | | | should start to see a trend by the end of the year |
| nontraditional products and subprime products. | | | | immediately following the elections. This has happened |
| Subprime loans per se are not the problem: Exotic | | | | before and will happen in the future, but rest assured, |
| mortgages are the problem. | | | | once we come out of the slump, we will have learned |
| What produced this crisis? Partly, it's a private label | | | | something and will be able to avoid another downfall |
| market that Wall Street charges for credit. This | | | | for a number of years to come. |
| market creates securities that slice up mortgages to | | | | |