November 2008

With the results of the election now in, it seems clear that all of us need to work together to resolve numerous problems. The ‘Yes We Can’ mantra should prove prescient, because if we cannot, we may not be in a position to live our lives the way we would want to. Draw your own conclusions, but I believe the verdict of November 4th supports a change in direction and a brand new perspective. This election year has drawn more interest, and seen more money spent than any in memory. I think we must account for the results; at least for the first few years. So assuming (Yes) We Can, I wonder if we really Will? Expectations of our newly elected leader are very high, leading me to believe that some will be disappointed.  That becomes No I Won’t or It’s Not My Fault or something to that effect. While there are many issues that have excited and motivated people in this recent election, don’t worry; we will focus on economic and real estate issues here. This will not become a ‘political’ letter.

            In previous newsletters, I had speculated about the difficulty of a homeowner or buyer obtaining mortgage loan money, yet I was corrected more than once by some in that business. I was informed that getting a mortgage is not so difficult, but confirmation was offered that underwriting standards have tightened and the liar loans (where a borrower need not provide much of any factual data to get loan approval) have all but disappeared. And that’s a good thing, in my belief.  I submit that lenders are welcome to loan money to anyone they deem worthy, but when the loans are repackaged and those pooled mortgages are given high credit ratings (when there may not be any truth involved)  and sold to money funds and investors looking for safe investments, someone really got tricked. A lender that wants to make a high risk loan has the right to do so, but should expect to keep the loan in their inventory and not repackage it pretending it is something else. Because of our experiences of financial loss due to the creative credit default swaps and derivatives that our money fund managers and advisors got us into (even without knowing, in many cases), we were all punished. Hopefully we are wiser now. Your 401(k) -some are now calling theirs a 201(k) – may have fallen off the edge of the world, or your sales projections may have tumbled downwards. Nobody escaped unharmed.

            What is basic to our sense of fairness and our ability to look into the future and feel secure is for the excess inventory of listed homes to come down. No other change will do the heavy lifting to get our real estate market balanced again. And this most recent month shows good news in a small reduction of inventory in all price ranges. When a highly charged election year overlaps with a severe housing and credit crisis (something that only happens every 137 years or so) a kind of paralysis sets in. Some experts see home prices in a freefall and others think they still need to come down further. Who is going to be the first to blink? Will sellers (one by one) lower their listing prices to a level that makes a buyer sit up and take notice? Will buyers decide they can’t wait forever and take advantage of aggressively priced homes? It seems as if neither camp wants to move first. But on a house by house basis, there are numerous sales and there are buyers moving into their new homes in Santa Fe. I have been known to repeat the good news at least twice as often as the bad news: we are seeing home sales at an annual rate of about 1420 transactions per year right now. What’s wrong with that?

            While 2005 had a record setting rate of 2798 homes sold, that was actually not representative of this decade, and we may not see that level again for many years. Really good news would be if we are able to get up to the average sales per year for this decade. The average over an 8 year span from 2000 to 2007 was 2264 per year. Many of those sales included buyers getting easy mortgages and becoming homeowners without putting much of any money down, plus they were approved with sexy adjustable rates (that are now or have reset higher). So just maybe our rate of sales today is not so terrible. There is no way to really know how many of the previous 8 years sales were “artificial” and/or created from fuzzy loan applications and unverified incomes. Many were that sort of loan but will never go into default. But even if I guess 15% (conservative) that means 340 home sales annually might not have happened with a normal level of caution and care in loan underwriting.  2264 less 340 leaves 1924 (average) homes that might have been sold to buyers with real money down, income that qualifies the borrower for traditionally sound debt/income ratios and good or fair credit. And if we are at 1423 in 2008 (using year to date of 1186 -over 10 months- times  1.2 to extend an annual guess) then we are off of that number of 1924 by about 26%. When you allow for the dearth of sales now, due to great uncertainty, lack of trust and general fear and loathing, today’s market is not all that far off of our recent averages. A fair definition of recovery might have us within 10% of the average over that 8 year span. 1924 less 192 leaves 1732 (90% of the average given). If 2009 sees total sales of around 1732 homes, townhomes and condos in Santa Fe city and county, I would be delighted. Then we would have something to crow about. If it plods forward at around 1400+ per year, we will still be awaiting the beginning of the recovery. This is a guess combined with a hunch followed by feelings.

            The amount of inventory of residential homes in Santa Fe county has been consistent since spring and sales have also been flat. That is actually called good news around here because the deterioration has clearly stopped and the trend lines have leveled off. Most of the slide into an excess of inventory happened between the end of 2006 and the spring of 2008. We were hopeful that this recently passed summer and fall season would show a recovery on the way, but it didn’t happen. Now we move into winter when sales are not likely to pick up. And with some sellers renting out their homes instead of leaving them vacant and for sale, next spring may show a small spike in inventory. And that means next spring & summer will prove to be all important to measuring whether we are building momentum or if we might experience another flat year in 2009. Our local real estate market just may be much healthier than others. Inventory levels in all price ranges actually went down slightly in the last month. Can 2009 possibly see some real improvement in sales volume? I am very optimistic and expect things to improve in 2009. But I also expect the improvement to be quite small in scale. We needed a couple years to get into this shape and I am certain it will take us a couple years to come out of it. As I attempt to show, we are not very far away from our average number of sales for this decade

            On a wider scale, the recovery necessary to stabilize the world’s economy will take much stronger medicine than has been prescribed to date.

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