Job creation in CA and nationally is slowing. If this leads job losses then expect the pressure on home prices to deepen.

Wall Street is now pricing in slower growth. Whether this is a mild recession or a large one will in large part depend on the availability and terms of credit and on the willingness of borrower's to take on risk. If credit goes through another round of tightening or if borrower's become more risk adverse then ecomonic conditions will additionally pressure home prices.

A bottom will not form until home sales and home starts stop falling and foreclosure activity stops increasing.

It is unlikely that foreclosure activity will slow until at least the end of spring 2008 when most of the ARM reset are completed.

Thus, the bumping ride continues.

What next for residential and commerical real estate markets in Southern CA?

In one sentence - Down we go!  Caveat is that very long term things still looks good due to demographics.  

It should be clear to all now that the lending problems in the subprime market have not stayed within the confines of that market. Foreign agencies in Germany have bailed out at least one of their smaller banks that uses commercial paper to fund the purchase of US CDO's. One the other side of the Ocean the US Federal Reserve added liquidity to the credit markets by buying bonds that banks were holding.

The economic fallout from reduced spending by those involved (agents, brokers, escrow offices, loan officers, painters, tile workers, ect.) with the housing market should soon begin to show up in the aggregate numbers.  In Saturday's, LA Times, Christopher Thornberg, former UCLA economists now with Beacon Economics, indicated that "people are hurting."

Consumer spending will likely be effect by the downturn in housing as the slump continues this year and next. Additionally, as commercial real estate activity slows, as it will due to lack of available affordable financing, job growth will at least slow and possibly stall. That will also likely reduce consumer spending.

One significant unknown is how deeply consumer spending will be effected. As consumer spending becomes more deeply effected the more likely a recession becomes.

The recent drop in the demand for oil is not a good sign. The demand for oil, the price of oil, and global growth are directly related. Is the drop in oil a sign the global growth is stalling?

And what does this all mean to the price of your home? It means that there is almost nothing in the environment that will support price and that the price of most homes will fall in the months ahead. The slump will not end before most of the adjustable rate mortgage have reset. It may not end there but it will not end before that time.

Is this a time to buy? Not for most people. Is this a time to try an sell? Not for most people.

However, any home priced well will sell within 90 days. The key is correct pricing. Most are unwilling to market there home at a price that will sell. It will mean taking a loss when compared to 1 or 2 years ago. Of course, if you bought your home 5 years or more ago, you have still made a good deal of money.

Expect further slowing in the real estate markets - residential and commercial

Commercial and residential real state markets are buoyed by the ability of bankers to securitize and sell loans. This provides more funds to make still more loans. Bankers ability to securitize is being changed and buyers of the securities demand higher lending standards and greater return.

Over the last several weeks, the market for sub prime residential mortgages as all but disappeared, the market for prime residential mortgages has been characterized with much tighter lending standards, and the market for leverage financing commonly used in buyouts and by real estate investment trusts (REITS) has seen a huge decline in volume as buyers want more loan covenants and higher interest rates.

This is likely to lead to slow down in the commercial real estate market, as interest rates rise and lending standards tighten. This will also likely lead to further declines in residential real estate prices as more potential home buyers are unable to get financed and as more potential home buyers decided that the asset they are considering is not worth it to them.

Still there is little signs of reduced consumer spending. As long as corporate profits are maintained employment is likely to stay high and consumer spending likely to stay healthy.  Thus, these changes are not likely to spread to the general economy and the changes in business conditions will remain limited.  Nonetheless, a slowdown in the volume of deals and the rate of expansion is expected.

Risks has increased in the markets everywhere and the credit markets have reacted to that. This is not surprising or unexpected this late in the business cycle. The stock market is also reacting to the changes in the credit markets and to the increasing perception of risk. While the world is not ending, life may go back to how it was before massive amounts of credit were available, cicera 1999.

Will the turmoil in the funds that have invested in instruments backed by mortgages effect the Southern California residential or commercial real estate markets?

Recently, two hedge funds, High-Grade Structured Credit Strategies Enhanced Leverage Fund and the High-Grade Structured Credit Strategies Fund, that invested in securities backed by mortgage were significantly effected by the losses.  Now United Capital Asset Management is having problems.  Paul Ullman, who runs  the hedge-fund firm, HFH Group LLC, New York, was quoted in the Wall Street Journal (WSJ) saying, "The marketplace for mortgage-related asset-backed securities is characterized by a wide difference between bids and offers, and as a result, trading volume has dropped."

This will likely led to even tighter credit moving forward for every new mortgage borrower.   Further, this will put  pressure on  residential home prices.  Thus, there is still no end in sight to the current market conditions.

On the other hand, with employment high there is no sign of accelerating deterioration on the horizon.  The most likely causes of any accelerating deterioration continues to be consumer spending, as I have written about previously.

Another possible cause is if commercial lending is affected by generally tighter credit.  This would damp companies ability to grow and hire and the lack of hiring would likely effect consumer spending.  However, there is presently no sign that this is occurring.

Long term rates headed higher

Recent action in the bond market strongly suggests that interest rates for most mortgages will be going up. This will put further pressure on demand as less and less families are able to obtain mortgages. Price will eventually have to come down for any seller who must sell. The demand is simply not there.

Homeowners who are able to continue to make their mortgage payments and ride out this market are likely to do fine in the long term. Those who lose their homes or are forced to sell will not do as well. This has happened before. Those who bought in 1989 or 1990, before the last downturn, and where able to ride it out did quite well.

When may it end?

If history is any indication, not for a while. The basic drivers of demand are income and for most that means employment. Until employment and income heats up significantly demand is not likely to be sufficient to create an upturn. An artificial driver of demand is exotic mortgages. It would seem that the days of those loans are over until at least the well into the next up cycle.

Higher bond prices are not good for the rest of the economy either. It cost companies more to finance their operations and thus they will slow expansion. Whether this will lead to higher unemployment is anyone's guess at this point. It may mean just a slower economy for a while.

As the cost of capital increase, demand for it will decrease and this in turn means that less will be spent on what capital buys. The typical uses of capital include labor and equipment. Thus, capital spending excluding government spending, may be a good indicator to watch for clues as to a trend change in the housing marketing.

What I have been doing is much more mundane. I have been working with clients. Since the day after Christmas I have seen a huge surge in the volume of client interest in seeing and buying homes. We are not talking about tire kickers here. My last deal I was in multiple offers. I have colleagues consistently selling homes for 95% or better of list price in less than 30 days.

Most agents that I speak with are having the same experience. Is this a Southern CA phenomena? A Los Angeles phenomena? Will it last?

Well from the recent national stats the sent the stock market down recently it may be a local phenomena.

Make no mistake though, there are individual all over the country we can't handle the most recent adjustment to their adjustable rate mortgage or who have been recently unemployed. The question is, will there be enough of sales caused by these circumstance to put downward pressure on SoCal home prices?

Presently, it looks like the answer is no. SoCal employment is very high and that trend is projected to continue.

What it does mean is that the previous appreciation trend of 20% or more will not return soon and that slower annual appreciation of 3-6% will be near term trend.

It also means that some investors will remain in the market and that others will enter as it becomes appropriate for them to do so. Builder's meanwhile, still have a large inventory overhang and that should keep a lid on appreciation in the short term.

As I have often written, employed homeowners do not just stop making payments and walk away from their homes. Thus, nothing other than rising unemployment is likely to cause home prices to fall significantly further in the Greater Los Angeles area.

I have not written recently because for the most part nothing material has changed. The real estate market has been steady, after an initial drop, and no major economic trends have emerged.

Local and national employment is still good. Liquidity is still good, though not as great as it once was. This is by no means a tight credit market and arguments still rage about the possible large economic effects of the changes in the real estate market.

So let's focus on how we will know when a bottom occurs. First, we won't know until after the bottom occurs. Unlike the equity and futures markets which have tremendous volume and almost instant reporting of price data, the real estate market has neither large volume nor quick data reporting. Thus, getting in at the bottom through planning is very unlikely. Second, volume may never return to the level seen during the unprecedented real estate boom as the speculation boom is over. Thus, we must look at relative volume, incentive availability, and price.

Once a real estate bottom has passed we will see volume increase on a year to year basis, incentives will become increasingly unavailable, and prices will show modest year on year increases. Until there are signs that a bottom has passed, volume will be lower or steady on a year to year basis, incentive will be easy to negotiated, and prices will be lower to steady on a year to year basis. Prices will not likely significantly fall unless there is a material change in local employment. Further, the recent fall in the US dollar may also help support prices in the Southern CA region as foreign buyers continue to buy real estate.

Is now a good time to buy? That depends on your specific situation. A good lender, real estate agent, and tax adviser can help you determine if now is the correct time for you to buy. If you are in Southern CA, please feel free to contact me for an objective analysis of your situation.

Terri Champlin

As expected following the housing boom's easy credit environment, credit is tightening. Earlier this month new lending guidelines were issued that will likely make it more difficult for borrowers to get loans.

First, lenders offering loans with payments options, loans with teaser rates, and other non-traditional loans will now be required to qualify borrowers based on the fully index loan rate rather than the initial or lowest rate.

Second, income verifications is encouraged and with a new IRS express income verification process, no document and low document loans, otherwise known as stated income and stated assets loans, will likely be used much less.

What this likely means to real estate sales is a further reduction in demand and further pressure on prices. Just as easy money fueled the past boom, tighter money will likely either make the downturn longer, steeper, or both.

This will likely give pre-approved buyers more leverage with sellers, as there will likely be less buyers ready, willing, and able to buy.

Do home values in areas where schools are well respected by the residents have more price support in a falling market than homes in other areas? Yes, at least in areas where private schooling is an option.

To see why this is so imagine a homeowner living in an area where the school is not to their liking and they pay for private schooling. The school expense is not tax deductible and the school is likely to be less conveniently located. This same owner could buy a home that is in a neighborhood where the schools are to their liking and effectively convert all the private school expenses into tax deductible home mortgage expenses and they likely have a school conveniently located near their home.

Thus, when private schooling is a practical option, demand for homes in areas where the schools are generally respected are likely to remain high even in markets where prices are falling. When demand is higher relative to the surrounding areas, then prices also tend to be higher as well. So expect uneven price declines as this buyer's market  continue to unfold.

To assist interested California stakeholders, the State of California periodically releases information on school performance. Other sources, including personal and anecdotal sources, must be used to obtain information on art, music, athletics and other areas of interest that are hard to discern from the State's performance assessment.

Buy Now?

Maybe now is the time to buy. If you are buying a house to live in for several years does it really matter if home prices drop? As long as you can afford your house payment, it really doesn't. As long as you do not have to sell as a result of a job loss or relocation then it does not matter if you are "underwater" at any point during which you own it. The only point in time which matters is the period in which you are going to sell it. So if you can hang on during any downturn then there is no reason not to buy now.

If you have a good steady job, have a down payment, have 2 months of cash reserves after closing, are employed in a field that is in demand or have multiple sources of income, then buy now. Why? Because whether you rent or you buy you are still paying a mortgage. When you rent you are paying someone else's mortgage and they get the tax breaks, any appreciation and they get the control. The owners control the landscaping, the interior, pet restrictions, and all material matters regarding the property. Don't underestimate the intangible benefits of owning. Buy when you can not when you think it is a good market or bad market.

Of course, if you are concerned about your job, don't have cash reserves, can't cover closing costs, or have a lot of other debt, then now is not the time to buy. If you want an honest discussion that will help you decide if now is the right time for you to buy, please contact me.