Real Estate

I got into real estate at a time when the boom in real estate was well underway.  One of the things that surprised me at the time was how high prices were going.  I remember showing one not so great house in Cameron Park and thinking it was priced too high, then seeing the same house on the market the following year for $100,000 more and actually sell.

Because of this experience of being surprised by how high the market could go, I realized as the market decline accelerated that I should not be surprised if prices got really low — though naturally as a homeowner and as someone who’s income is tied to the real estate market, I hoped they wouldn’t.  So for the most part, the decline in prices has not surprised me too much.  It actually took place more slowly than my critics predicted (those who predicted I’d be out of business by 2006) — but to give my critics their due, the decline in value from 2006-2008 has justified much of their pessimism.

The Economy

If the decline in home values is not that surprising, what has surprised me has been the extent to which the rest of the economy is diving off the cliff with it.  Last week we learned of the federal takeover of Freddie Mac and Fannie Mae.  This week brought the sale of Merrill Lynch to Bank of America.  It also brought the failure of Lehman Brothers, which the Fed did not step in to prevent.

So the Fed’s gotten smart and is trying to minimize the risk to the taxpayers and the currency, right?

Wrong. 

I’m not an economist, so maybe the wrong things scare me, but to me one of the more frightening developments in recent weeks has been the Federal Reserve’s announcement that it will now accept "equities" (stocks) as collateral for loans. 

Here’s a prediction for you.  Remember a few weeks ago when we started to hear that the federal government might loan Fannie Mae and Freddie Mac some money, but would only do so as a last resort?  Within a few weeks we heard that the government had placed Fannie and Freddie in conservatorship. 

My prediction for the week ahead is that a spokesman for someone in the Federal Government (most likely someone at the Fed) will go on record that the change in the collateral allowed for Fed loans is only intended to give the Fed leeway in case it’s needed.  That said, the Fed will proceed to accept securities as collateral for several loans, and we’ll begin to hear about some of these companies falling within about six months.

Politics

It seems to me the only people who think the present economy is doing well are insane John McCain campaign advisors, who tell us we’re on the brink not of recession, but of accelerating prosperity.

You can’t make this stuff up.

I’m getting exposed to a lot of the economic news in the reading I’m doing for a new liberal politics blog I’ve been working on.

What It Means for You

In general, the failure of financial institutions all by itself shouldn’t put you off buying a home.  If your mortgage is current, you won’t be foreclosed on no matter who holds the note.  However, if your situation is such that your income is uncertain, then naturally you’ll want to think twice about home ownership (or any other major purchase).  In general, your personal "economy" and prospects are more important in this decision than the overall economy, unless you have to move soon.

Will home prices fall some more?  Yes, I believe they will.  How much?  I don’t know.  Will loans get harder to get?  Yes, to some extent that’s already happened, with 100% financing an absolute rarity already (though great FHA loans are still available at 3.5% down).

We’ve already seen a lot of increased demand based on the price decreases of 2006-2008.  The last week or two of inquiries has been pretty slow, however, so October may be an exception to the rule.

If you’re selling, what all this means is that you’ll have a longer wait than you thought if you’re not going to get realistic about your price and instead want to "wait to see what happens".  We may reach equilibrium in certain areas within the next year or two, but I don’t see recovery taking place that quickly.

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