It’s been referred to as “Nightmare on Wall Street.” In the past two weeks, the government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America. If that weren’t enough, the Federal Reserve announced late Tuesday night that it was loaning $85 billion to American International Group (AIG).
Our nation’s financial system is in the midst of a massive shakeup, caused largely in part by this decade’s housing correction. The housing correction has occurred largely because speculative investors as well as marginal borrowers were purchasing homes with unreal loans as fast as production builders could complete them. If you are living or working in an area that hasn’t had land available for substantial housing development in years, then you haven’t seen much of this in your local market. The higher-end communities around San Francisco that have showed the most resiliency to price declines have had extremely low levels of new home construction for decades. But overall, between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can’t pay back the loans, a problem that is exacerbated by the decline in housing prices in a majority of markets. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.
According to the Wall Street Journal this week, “At least three things need to happen to bring the deleveraging process to an end, and they’re hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.”
Only time will tell how and when this shakeup will correct itself. The recent figures released by DataQuick (http://www.dqnews.com/News/California/Bay-Area/RRBay080918.aspx) this week are a hopeful sign, despite the negative news they unveil. Among the highlights:
- “The pace of Bay Area home sales reversed its July uptick and dropped again last month, marking a return to the long-running waiting game that many potential buyers and sellers have been playing for more than a year.”
- “A total of 7,232 new and resale houses and condos were sold in the nine-county Bay Area in August. That was down 4.7 percent from 7,586 in July, and down 0.9 percent from 7,299 in August 2007, according to San Diego-based MDA DataQuick.”
- “Last month’s sales total was the second-lowest for an August, behind 6,688 sales in August 1992, in MDA DataQuick’s statistics, which go back to 1988. An “average” August had 10,031 sales, while the peak August in 2004 had 13,940.”
- “At the county level, foreclosure sales ranged from 8.6 percent of resales in San Francisco to 61.3 percent in Solano County. In the Bay Area’s other seven counties, August foreclosure sales were as follows: Contra Costa, 54.4 percent; Marin, 13.5 percent; Napa, 39 percent; Santa Clara, 24.7 percent; San Mateo, 16.6 percent; Sonoma, 41.6 percent.”
- “The median price paid for all new and resale houses and condos sold in the Bay Area last month was $447,000, down 4.9 percent from $470,000 in July and down a record 31.8 percent from $655,000 in August 2007, according to MDA DataQuick.”
- “Last month’s median stood at the lowest point since January 2004, when it was $440,000. The median peaked at $665,000 in June, July and August of 2007.”
Waiting for the bright spot? Keep reading. There’s no question, the result of foreclosures have drastically hindered our median sales price in many of our markets. And for those sellers who are not under duress and are just looking to sell, they are forced to lower their prices dramatically just to compete.
But we knew that the housing correction posed the biggest risk to our economy and that our economy and our markets would not recover until the bulk of the housing correction was behind us. The good news is that we are in the midst of depleting much of our distressed inventory. With stats like 61.3% of sales in Solano County being foreclosure sales, 54.4% in Contra Costa and 41.6% in Sonoma County, we are starting to push through that negatively impacted inventory. And once we do, we will start to see a market rebound. No, it won’t happen overnight. But as it does, we will see first a leveling off and then, ultimately, a positive increase in market conditions.
