Phillip's Blog

Last night we all went to bed with dreams of the largest single day increase in the Dow in 5 years dancing in our heads. While we slept the foreign markets decided the Fed rate cut wasn’t enough to overcome the jitters in the credit market and so, like all courageous Europeans before them, collectively took a swan dive off the top floor of the building. This morning, the negative effects from participating in a world economy have everyone jumping around, unsure of which direction the herd is going.

In case you have been asleep for the past few days, here’s what’s happening. On Friday of last week, Bear Stearns, one of the 5 largest investment banks in the country found itself in trouble as a result of too many bad loans affecting its’ liquidity. Investors got wind of this narrow margin and exacerbated the situation by pulling their cash out of the bank. It was a real depression era “run” on the bank. Keep in mind this is an investment bank, not a retail bank. So no FDIC insurance is available for these guys, but then the average American doesn’t have any money in them either.

Over the weekend, the Fed stepped in and brokered a fire sale of the bank to J.P. Morgan (another one of the country’s 5 largest investment banks) for a mere $2 per share. Wow! Wonder what the commission was on that? In any case, all the markets took this as sort of good news, but still there exhibits a lot of nervousness with the Fed meeting scheduled for Tuesday and everyone debating how much it would cut the funds rate. It was a toss up between 100 basis points and 75 basis points (1% vs. ¾ %) drop in the funds rate.

As you probably know by now they moved it 75 basis points or ¾ % and the stock market absolutely took off, finishing up 420 points – the highest gain in 5 ½ years! Yet this was insufficient for the goofy Europeans and like I said, they all jumped out of the 5^th floor window. Now, the Dow is reacting to that and fluctuating between positive and negative territory. Before the day is over, the Dow may very well give up all 420 points. It’s just 9:30 and already down 50 points.

Here’s another event that will blow your mind. Yesterday VISA went public at $44/share in their initial public offering, raising almost $18,000,000,000. Yes, that’s 18 Billion dollars, with a capital “B”, the largest IPO in history.

What is wrong with this country when a company that actually makes nothing to create wealth garners this kind of attention in an IPO? Not only do they manufacture nothing, they earn their funds by sucking the blood out of millions of your fellow Americans. And we reward this behavior by heaping mountains of cash upon them????

There has never been a better representation of the Biblical money changers than this. You know what I’m talking about…the ones Jesus chased out of the Temple. Guess what? THEY ARE BACK IN THE TEMPLE!!

So, what does all that have to do with real estate? A BUNCH.

The banks are in trouble because they bought bad loans from the mortgage companies. The mortgage companies are in trouble because they made too many stupid loans to stupid people who had no business buying houses they couldn’t afford. So now as a result of this entire trickle down economics, the Federal government is stepping and bailing them out with your tax dollars. Oh, maybe not by overtly writing the checks, but by flooding the market with cheap cash and loosening the credit standards to which they hold the banks.

And the end result is that while all this plays out, the real estate market suffers because of the psychological paralysis brought on by all these market manipulations. In essence, Rome (our market) is burning while Nero (our government) plays his fiddle. Instead of throwing cash at the problem, drive some of these predatory lenders out of business!

Yet in all truthfulness the market fundamentals haven’t changed. The government gaffs aside, we are simply going through a correction that was inevitable. All real estate runs in cycles; it is the economic reality of the industry. We had a good run up from 2001-2006, now it’s time to calm down and let the market naturally correct. I just wish we could go through it without all the gyrations of the central bank and the abundant negative prognostications of the news media.

Fortunately we haven’t seen the mass hysteria in this market that evidentially exists in other parts of the country. Meaning that the foreclosure rate hasn’t risen 40% in the past 6 months – locally it’s only up 4.2% from this time last year (and that’s about how many people took out those stupid loans). Instead of experiencing 16%-18% annual appreciation, the rate of increase has dropped to 3%-5%. Not fantastic but certainly no reason to act all depressed.

However, as I discussed in the last blog, inventory is indeed high and prices are somewhat down, so now might be as good as it gets for finding a real deal out there. The cycle will end soon as the banks settle this thing out with the Fed’s help and those mortgage companies that should be out of business go away. When all is said and done, it will just be a blip on the radar screen of our ever expanding economy. The American economy is amazingly resilient, especially if the government exhibits self control and lets it correct on its own. We’ll see.

Hope you find this info helpful. As always, we are here for you!

It’s been a few weeks since my last posting to this blog. I am somewhat disappointed that no one called to ask if I was in good health. Guess that proves that no matter how important we perceive ourselves to be, it simply isn’t so. Oh well, on with bigger issues.

The numbers were released last week for February and this combined with January’s numbers show that the prospects are still uncertain, especially given the typical seasonal fluctuations. I won’t bore you with all the details and graphs, but here’s a quick run down on the three important indicators that I track monthly.

Inventory – it is still way too high for this time of year, coming in at about 14,500 units currently on market. This is just under the inventory peak we experienced back in the fall and shows that despite the negative warnings, local home builders have continued to churn out new homes. This blows my mind and sets them up for some serious fire sales later this year.

Median Home Price – it has dropped steadily from the high of $187,900 in December to the current level of $168,000. This is the lowest median home price since March of 2006, and probably a function of the ridiculous inventory levels.

Gross Number of Closed Units – here’s the bright spot in the discussion – this number is on the uptrend! While it is still lower than it was last year at this time, the difference is very slight, and on a graph the lines are almost right on top of each other. More importantly the trend line is tracking exactly like the previous two years. While that may not be HUGE news, it does indicate something positive – people are still buying houses at the same pace they have been.

I’ll be quick to stress that the first two indicators definitely work in tandem – it’s the old supply versus price equation. Too much supply equals falling prices pretty much every time. Sometimes the third indicator will also trend with the other two, but here it obviously has diverged and is looking very much like previous markets have at this same time of year. In this, we see positive news in a dim market outlook. Personally, I still think this spring and early summer will see our local area pull out of the doldrums and start the move upward. That puts us far ahead of a lot of the rest of the country.

Hope this information helps. As always, we are here for you!