Getting bleaker by the day

While I feel strongly about the Bay Area housing market becoming a strong one for buyers in the coming years as prices decline sharply in nearly all local markets, I have tried to remain optimistic that the economy will slow slightly, yet remain in tact. But the more reports and statistics I read, the grimmer things look for the financial system overall. Yes, markets run up to an unsustainable level all the time, and then pull back for a correction. Nothing new there. But this latest run-up puts us in uncharted territory - combining 40-year-low interest rates with the loosest underwriting standards in the history of lending. Did you really think Richard and Suzie down the street should have "qualified" for that $1M mortgage when they earn a combined $130k/year? It didn't add up then, and it doesn't add up now. And the fallout is underway. The severity of it is what no one can put their finger on. But many are starting to really get worried about how bad it just may become, including yours truly.

Check out this column by Paul Krugman in this past week's New York Times on why the Fed's latest attempts to rescue us from all this just might not work.

The real agenda with the Bush foreclosure plan

You think the current administration really cares about the homeowners in danger of foreclosure? I. Think. Not... Am I surprised, and should you be? Hell. No...

See details here and what Treasury Sec. Henry Paulson revealed.

Sub-prime mess = Crack cocaine?

An interesting comparison from the District Attorney of Brooklyn, NY.

Leamer says no recession..... for now

What do I think? I am on the fence on this one.. seriously. I have much respect for Leamer and his work at UCLA and feel strongly that his Anderson Forecast team is more impartial than any of the big brokerage houses' anaylists (ya think?). But the recession call is still too early to call. It's close, but it's still too early. The election year of '08 will answer nearly all of the questions about where this country is headed in the next several years, both politically and economically, which can be one and the same.

We know that home sales and pricing will fall in '08, and foreclosures will continue to rise, but the employment numbers and interest rates in the first part of the year will dictate where we go. Hang on for an interesting ride...

Read this to see what he says about California specifically.

Current rates, volatility and the rate freeze

Check out RPM Mortgage's Julian Hebron's weekly rate overview:

My lock alert last week proved effective, as extreme volatility continues. Fixed and ARM rates opened this week .375% to .5% higher than last week. Last Wednesday, mortgage bond yields (that lenders look to for rate pricing) were at 2-year lows, and today bond yields (and ARM but not fixed rates) are at the highest levels since the peak of the credit freeze in late-August—all of this in 4 trading days. Because of this and reasons I discuss below, I think the rates below will drop.

FED/ECONOMIC NEWS 12/10-12/14

When the Fed announces their rate decision tomorrow at 2:15 Eastern, I think they’ll cut the Discount Rate, a 1-to-30-day rate the Fed charges global banks for short-term loans in times of distress, by 50 basis points (.5%). This will bring the Discount Rate to 4.5%, which should finally start to mean something to cash-strapped money center banks (like UBS, Citi just this week) that continue to post bad debt write-offs. Until now, the Discount Rate hasn’t been low enough to be better than other options, but at 4.5%, it may be.

The Fed Funds Rate, a rate Federal Reserve banks charge each other for overnight loans, will likely be cut 25 basis points (.25%) to 4.25%, although many believe it could be a 50 basis point (.5%) cut given Fed Chairman’s November 29th acknowledgement that “current stresses in financial markets make the uncertainty surrounding the [economic] outlook even greater than usual.”

But bond trading, which takes cues from Fed rates, certainly doesn’t show expectations for 50 basis points. Friday’s jobs report showed the steepest wage growth in 2 years, which stoked inflation fears and led to a bond selloff that continued into today. This Thursday and Friday, there are 3 critical inflation reports. If the Fed Funds cut is 50bps (downward rate pressure) and inflation comes in higher (upward rate pressure), fasten your seatbelt for more rate swings.

RATE LOCK STRATEGY

When a deal is close to being real (e.g., when purchase offers are going out), I give definitive quotes. But on actual execution of rate locks, I’m taking more of a trader’s approach to capture opportunities amidst the volatility. With day-to-day rate swings of .25% or more, and economic fundamentals that point to lower rates over the next 25-60 days, I can (and do) capture rates on any single trading day that are better than any 25 to 200 day moving average rate. Especially lately, I've been able to capture better than the quoted rate.

THOUGHTS ON THE RATE FREEZE

A client told me Saturday night that a couple he knows – Jumbo A-paper borrowers with 20% equity, perfect credit, and high-paying jobs – were adamantly defending the stance that they’ll qualify to get their 5yr ARM from 2004 frozen. This profile couldn’t be further from qualifying, but it proves how confusing and disruptive to lender underwriting operations this rate freeze will be. You multiply this couple by thousands who will clog up the system “just to see” if they can qualify, and it spells trouble.

In short, I think it’s mostly political rhetoric that has just enough credibility to come in handy during an election year. Picture your candidates stumping, and referencing the one case their assistant dug up as a success story. It might get headlines and votes, but it doesn’t unwind this housing correction any faster. I’m certainly sympathetic to borrowers who are in distress; I’m in the trenches with them daily. But government intervention in free markets is unwise and will probably prove to prolong this correction.

Are mortgage rates poised to begin their incline?

Check out the Realty Times Interest Rate Update. What do you think? Time to lock in now if you are a buyer?

Berkeley fixer a stones throw from Solano Ave Zachary's

This spacious bungalow sits on a nice corner lot in a great neighborhood known as Thousand Oaks where you can actually see the backside of Zachary's pizza up the street. With a little work and sweat equity, this 1265 sq ft, 2 bed/2 bath home can be brought back to life. Based on the high amount of interest at the open house and fab location, I expect this to sell quickly and likely above asking price.

I predict a selling price of at least $650k, maybe up to $700k.

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"Ultra Chic Urban Dwellings" in the Mission - Kevlar required?

This thread on SocketSite discusses the new development at 20th and Shotwell with its 6 spacious contemporary units, including 2 enormous 2700 sq ft penthouses priced very reasonably (in this market anyway) for the space.

Nice units overall but the penthouses stand out as unique. The point of contention here is the exact location within the mission - arguably one of the roughest spots that is smack-dab on the of boundary line between rival gangs (a bloody street, literally) and a 1/2 block from the fire station.

Bottom line - either you can live in the mission and handle it, or you can't - and you should live in Pacific Heights or the Marina where apparently no crimes ever happen.

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Potrero Hill Fixer in contract - don't believe the pretty sketch

Wow. This piece of work was priced at $760k and is in contract within 2 weeks of listing. The 1044 sq ft 2 bed/1 bath SFR has dual garages holding up to 3 cars, or room for additional living space in lieu of car storage. The floor plan is strange and mostly dysfunctional in that old traditional way and needs full systems upgrades and likely should have walls relocated with a more modern layout.

If the purchase price is anywhere near the asking price, I see this as a terrible play. The comps aren't much more than the asking price here, and trust me when I say this is a major fixer that needs a minimum of $200k (more like $300k) in work to bring up to the $1M home the buyer is hoping for. If anyone knows more about this property, or sees something I am missing here, please enlighten me.

I know "the Hill" is desirable and all, but this particular locale is just around the corner from everyone's favorite public housing complex - the Potrero Hill Projects - where O.J. grew up. Oh how appropriate.

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Downward spiral in Oakland beginning?

Jump down to the UPDATE on 721 Rosal.

2 good examples of the mess (for sellers/owners) in Oakland are highlighted by these properties currently for sale: 6690 Girvin (above) and 721 Rosal (below). Girvin was built in 2001 and sold for $855k in October 2004. It was listed for $1.249M (per zillow) as of 10/12/07 but currently is listed for $799k, an astonishing $450k drop. Rosal is in a fantastic neighborhood in Crocker Highlands hear Piedmont, and was also purchased for $855k (no relation to Girvin) in August 2005. It is currently listed for $829k after a 100k reduction and has been on the MLS for 35 days at the new price. Owners purchased with 100% financing. This is only the beginning, folks... and a major reason I have my radar on certain parts of Oakland for 2008-2009 purchases.




UPDATE 12/19/07: 721 Rosal has been reduced yet again to $749,950 - a total reduction of $180k from original asking price 3 months ago. The trustee sale is still scheduled for Thursday 12/20/07 so this seems to be a last ditch effort as a relist to get an offer before the bank buys it back.

UPDATE 12/9/07: 721 Rosal has been reduced for a 2nd time - now to $799k (down from $929k about 3 months ago). A trustee sale is also scheduled for Dec 20 on the Alameda County courthouse steps in Oakland.

An interesting visit to the vacant open house today revealed the location to be on the far Lakeshore side of Crocker Highlands (not bad, but not great) and the "stylish contemporary home" to be a strange mix of design including strange bright-colored plastic sheets as backsplash and wall panels (not kidding) in the kitchen and "media room."

A discussion with the listing agent revealed his belief that it comps at $850-860k right now - this after I commented on the downward direction of the market in Oakland. He disagreed, and then in true realtor sales-speak said "someone paid that much once, someone else will pay that much again." I was speechless, but then again not surprised. He not only subscribes to the idea of the greater fool but also the idea of the NEVERENDING greater fool! Cheap comedy.

He also claimed that it comped out at the original $929k asking price only 3 months prior. So he admits there has been a drop in "value" of approximately 70-80k in 3 months? But according to Mr. Real Estate Agent, there is no slowdown in Oakland. Of course not.

All asset bubbles burst, my friend. The air leaks slower in some (real estate). Fast in others (dot com bust).

Buy? Sell? Rent? Answer my question, jerk!

Sorry for the vulgarity, but this is one of my fave sports moments when John McEnroe yelled this at the chair umpire way back when....

So where do you stand? Are you a happy buyer, seller, or renter of San Francisco/Bay Area real estate right now? If you want to know my take on this, keep reading. If not, keep reading. Let me start with the wonderful notion that afflicts many desirable areas: "Real estate can never go down here - everyone wants to live here and they always will." Over time, sure - this may hold true. But for market timers and true followers there are times this is simply not true. The next several years is one of those times. San Francisco is holding up rather well thus far but that has been mostly a supply issue at this point, whereas Oakland and the other parts of the Bay Area are starting to implode. Terms such as "short sale" and "foreclosure" and "lender approval" are already running rampant there. San Francisco will follow suit in coming years. Like I said.... where do you stand? I wanna hear from you....

Noe Valley 3 unit: Fast Track or not?

This very nicely done Noe Valley 3 unit property consists of a traditional 2-flat building front with a large detached 2-story cottage in the rear. The owner/investor purchased the property in January 2007 for $1.35M and completed a $300k remodel via contractor before putting it on the market on November 9 for sale as 3 TIC units, or as a whole building.

The nicely remodeled flats (minus the popcorn finish walls and sliding-mirrored bedroom closets) are vacant with floor plan changes and 3 beds/2 baths each, while the rear cottage is tenant-occupied by a very protected tenant. The garage is a piece of art (if you appreciate that sort of thing) with steel beam upgrades and room for 4-5 cars.

The caveat to this deal is the tenant's status in the cottage - the 85 year old woman appears to be the only tenant and is no doubt a protected tenant, but her daughter claims to be living there and protected as well, which raises some questions, as records show she is married to a contractor and resides in another SFR in SF. Hmmm.... Alterior motive for the daughter? Ya think?

Regardless, this can be a nice score for buyers of the 2 flats if Granny buys the rear TIC, as the whole group can then enter the lottery immediately with no 3 year waiting period. Herein lies the opportunity.... but who do you believe? And don't forget if it doesn't pan out that way, Granny is protected at a cash-flow drainage-ditch rate of $397/month in the cottage, which really does need upgrades. Can be a nice opportunity if the cards fall right for this killer location..... or not.

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Intro to Me

After failing to coerce friends to jump into the San Francisco real estate market with me in 2003, I dove in by my lonesome. Since then I have become hooked on the subject and industry - got my RE license in 2004 (though non-practicing), continue to research the hell out of everything on the subject, and have bought and sold 2 properties in SF since. Let's just say I am happy to be a renter currently. I am a true market timer and contrarian/momentum investor, and I am downright elated to wait on the sidelines for the coming years when cash will be king and the proverbial blood will run in the streets. This is my blog... Welcome to Bloody Street.