NATIONAL ECONOMY: As we begin this new year of 2008, the greatest unknown continues to be, can our national economy avoid a recession? The second greatest unknown is, when will the housing market “hit bottom” and stabilize? The answers to these questions are far from clear; however, there are some early indicators that suggest we are about to find out. As to the recession question, we first look at Gross Domestic Product (GDP). A recession is defined economically as two consecutive calendar quarters of negative GDP growth. Most economists and financial analysts are predicting 1% to 1.5% GDP growth for December, 2007. January 2008 expectations are for GDP to rise to 1.5% to 2%, as well as for the first quarter of 2008. The housing industry, historically has made up 1% of the total GDP and, in a down cycle, has lead the national economy into a recession. So, what’s different this time? Because of the “cheap dollar“, foreign trade and exports are up 10% annually and are offsetting 75% of the negative slide in the housing industry. Additionally, U.S. corporations are flush with cash and are prepared to withstand a short term disruption in consumer spending. Having said that, where is the real risk of a recession? In my view, the risk lies in the hands of the consumer and their willingness to continue to spend. Consumer spending represents a whooping two-thirds of our GDP. If the consumer becomes fearful and curtails their spending habits, the dreaded “R” word becomes a reality. December’s new jobs was a paltry 18,000 and the unemployment rate rose to 5%. Despite the fact that U.S. workers enjoyed an average 4.5% increase in wages during 2007, the constant negative drumbeat of the media relative to the sub-prime mess, foreclosures, and falling house values, could eventually cause the consumer to cut back. President Franklin D. Roosevelt, in the depths of the great depression, said “We have nothing to fear but fear itself.” He was right and that much hasn’t changed. That brings us to the second question, when will the housing market hit bottom and stabilize? Although the answer is a little less clear, and I will give you more data in order to clarify later in this newsletter, the short answer is that the housing markets should bottom out and stabilize by the end of the second quarter of this year. Should that occur, the negative bombardment of the media will abate and the consumer should start to feel more confident about their economic well being and continue their spending. Right now, I think that there is a 50-50 chance that the optimistic scenario becomes a reality and we will dodge the bullet of a recession.
THE FED WATCH & MORTGAGE RATES: As expected, Fed Chairman Ben Bernanke and his boys lowered rates again at their most recent meeting last December 11th. Now at 4.25%, their most recent rate cut was their third reduction in as many months. Some had expected a 50 basis point cut; however, there was but one vote of the nine Federal Reserve Governors to support such a move. Ben and the boys next meet on January 30th, and I would expect yet another 25 basis points reduction, bringing the Fed Funds rate to an even 4%. Bernanke, now in his second year as Chairman of the Federal Reserve, is under tremendous political pressure from both the Senate and the House. Senator Chris Dodd (D) Delaware, Chairman of the Senate’s Banking Committee and Congressman Barney Frank (D) Massachusetts, Chairman of the House Banking Committee, have strongly threatened the Federal Reserve with a dilution of their monetary powers and blame them for allegedly causing the sub-prime lending crisis. In response, Bernanke has proposed new Federal rules that would restrict banks in their mortgage lending. The proposed changes would (1) Require lenders to assess sub-prime borrowers’ ability to repay loans from sources other than rising home values. (2) Bar lenders from making high-cost loans that rely on unverified income or assets. (3) Ban lenders from paying mortgage brokers bonuses beyond what consumers have agreed in advance the brokers would receive. Both Senator Dodd and Congressman Frank have condemned the changes as not going far enough and have promised legislation that will impose much tougher restrictions on the mortgage industry. In my opinion, both Dodd and Frank are using the Federal Reserve as a political scapegoat…surprise, surprise. Furthermore, they either don’t understand or don’t want to understand that the majority of mortgage lenders are not banks and do not come under the jurisdiction of the Federal Reserve. Sometimes, some politicians are worse than ambulance chasing trial lawyers.
FEDERAL LEGISLATION & MORTGAGES: With one to one and a half million American homeowners experiencing or facing foreclosure, Congress, the President, and all those who want to be elected or re-elected in 2008, feel compelled to do something to help those in need. The question becomes, what to do and who to do it to? Having spent a total of ten years as a State Senator and U.S. Senator, I confess to not only observing these political feeding frenzies but, on occasion, being a participant. The problem that many legislators face is their lack of real world experience or knowledge of how a particular industry works and how to get the bad guys without hurting the innocent good guys. In this situation, legislators need to know that 93% of America’s homeowner borrowers are having no trouble making their mortgage payments. They need to know that of all the sub-prime borrowers, only 13% of them are delinquent on their loan and or facing foreclosure. They need to know that most first-time homebuyers between 2004 and 2006 were and are sub-prime borrowers. They need to know that sub-prime loans were one of the major factors in increasing the homeownership rate in the U.S. to a record high of 69%. Yes, they need to know that an estimated 15% of all sub-prime loans were made to speculators and non-owner occupants, many of whom never made a payment on their sub-prime loan and have already been foreclosed. They need to know that a small percentage of some borrowers, some mortgage brokers, some mortgage lenders and some banks knowingly participated in making fraudulent sub-prime loans. Like a skilled surgeon, a good legislator knows how to help those in need without destroying a system and process that has been overwhelmingly successful in turning the American dream into reality. With that being said, take a look at some of the bills that have been introduced and are under consideration by Congress and the President. (1) Freeze the rates on all low income adjustable rate mortgages for a period of five years. (2) Restructure the Federal Housing Administration (FHA) to permit them to insure refinanced sub-prime loans and to increase their loan limits to somewhere between $417,000 and $729,750. (3) Forgive taxes on any loan reduction provided by the lender. (4) Grant judges the power to delay or dismiss certain foreclosures and to re-write the terms of mortgage loans. (5) Allow states to issue tax exempt bonds and use the proceeds to refinance sub-prime and adjustable rate loans. (6) Raise the FNMA and FHLMC loan limits, currently at $417,000. (7) Prohibit a lender from making any loan that the consumer lacks a reasonable ability to repay, does not provide a net tangible benefit, or has predatory characteristics. My opinion on those seven proposals are (1) freezing mortgage rates against a lender’s will is nothing more than grand larceny and theft. If you want to freeze a mortgage rate, have FHA refinance the loan and let the federal government pay for below market rate mortgages. (2) Restructuring FHA and increasing their loan limits is a good idea. (3) Forgiveness on taxes due from a lender willingly reducing a loan balance is a good idea. (4) Granting judges the power to re-write mortgage loans and/or delaying foreclosure is a bad idea that will only cause lenders to seek some other form of security to remedy non-payment of their loan or they will just stop making loans to less than “gold plated” borrowers. (5) Allowing states to issue more tax-exempt bonds and using the proceeds to refinance low to moderate income sub-prime borrowers is a good idea, particularly in California. (6) Raising FNMA & FHLMC loan limits is a good idea that should have been done years ago. (7) Requiring lenders to determine the suitability of a loan for a consumer is a trial lawyers dream come true. As these legislative proposals, and others yet to come, move forward, we will monitor them and report back to you.
NATIONAL REAL ESTATE: Existing home sales for November were “UP” 0.4% according to the National Association of Realtors (NAR). October’s sales were off 1.2%. Chief Economist for NAR, Lawrence Yun, said the market appears to be stabilizing. “Near term existing-home sales should continue to hover in a narrow range, just as they have since September, and that’s good news because it will be a further sign that the housing market is stabilizing.” November’s sales were down 20% from November of 2006. Unsold inventories of existing homes also eased off with a 3.6% reduction for November. That follows a 1.9% increase in October. Currently there is a 10.3 months supply of unsold inventory. The national median existing-home price for November was $210,200. That’s down 3.3% from November of 2006. Sales of new homes fell 9% in November, compared to the previous month, after showing small gains in the previous two months. Unsold inventories of new homes in November rose to a 9.3 months supply. That level has only been exceeded twice since 1981. New single-family housing starts fell 5.5% in November compared to October. That’s the lowest level of housing starts since April of 1991. On the foreclosure front, new filings of foreclosures for November dropped 10% compared to October. Filings had also dropped 8% in September compared to August. On the other hand, we can expect another rise in foreclosures as some two million adjustable rate loans are due to “reset” over the next seven months. The number of those loans that will end in foreclosure is very tough to predict as most major lenders are already trying to counsel and work with those borrowers in order to avoid foreclosure.
CALIFORNIA ECONOMY & STATE GOVERNMENT: The Golden State only created 900 new jobs in November; however the unemployment rate remained steady at 5.6%. Clearly, the loss of jobs in the real estate, financial, and construction industries have taken their toll on our economy. Combined, they lost 13,000 jobs in November. However, I continue to believe that California will dodge the recession bullet and even if the national economy does go into a recession, California will be spared any serious economic dislocation. The reasons for my optimism are the very healthy high tech industries in the Bay Area and in Orange County and the continuing strong and growing export trade business enriching the ports of Los Angeles and San Diego. Additionally, both our tourism and agriculture industries are expected to have a stronger 2008. Our state government is once again in fiscal turmoil. Faced with a $14 billion dollar deficit, Governor Schwarzenegger has called the State Legislature into an emergency special session in order to try to balance the state budget for 2008. When Schwarzenegger was first elected in 2003, he faced a similar situation and was able to bring the state back from the brink of bankruptcy. This time it will be even more challenging and unless he is willing to call the bluff of the free spending legislature, we can expect some tax increases. On the home mortgage bailout front, Senate President Pro Tem Don Perata (D), from the Bay Area does not want to be outdone by the liberals in Congress and, so he has introduced legislation requiring lenders to “freeze” rates on adjustable mortgage loans. This is just one more instance of “ political grandstanding” and adds another example of just how anti-business our state legislature has become. Expect his bill to fail without republican support and should it pass, expect the Governor to veto another piece of legislative garbage. If the legislature really wanted to help those truly deserving California families faced with imminent foreclosure, they would pass legislation authorizing the California Housing Finance Agency to sell a new set of tax exempt bonds, backed by home mortgages, and using the proceeds to refinance and insure new loans to those in need.
CALIFORNIA REAL ESTATE: According to the California Association of Realtors (CAR), existing single-family home sales were “UP” 8.5% in November compared to the previous month of October. Condo resales were down 5.2% for the same time period. Compared to November of 2006, home sales were down 36.2%. CAR’s Unsold Inventory Index rose to a 15.3 months supply at the current sales pace. Historically, a “stable” housing market has a six months supply of unsold inventory. New home builders continue to work off unsold inventory with continuing price reductions and aggressive buying incentive. Projections for 2008 new housing starts are 113,500. That’s indicative of the fact that some areas of Southern California are experiencing much softer and weaker housing markets than others. Following are the comparative regional sales and median price numbers for November:
So, when do we see the bottom and stability in the Southern California housing market? Obviously, stability will be achieved at different times, just as the above figures reflect the market differences. However, barring a severe recession, I would expect a bottom by the end of the second quarter for Los Angeles, Orange, Coachella Valley and San Diego County areas. The Inland Empire should see the bottom by the end of this year. From those points forward, we should see prices stable to slowly recovering through 2009. Rents on residential property continue to rise an average of 4.6% annually in Southern California and the average occupancy rate continues at 95%. Rising rents and declining unsold inventories for sale will hasten the housing recovery.
This monthly newsletter has been published for the last fourteen years by Orange Coast Title for the benefit of their customers and affiliated companies. It is distributed by their title representatives for your reading and business purposes. Our title representatives work hard to continue to earn your title business by providing the very best in title insurance services. Give your next title order to one of our title representatives. You’ll be glad you did!
SOURCES: LA Times, Wall Street Journal, Desert Sun. DQNews, OC Register, San Diego Tribune, Inland Valley Bulletin, Barrons, Kipplinger California Letter, CAR, NAR, BIA, and MBA
