Burbank Real Estate Blog

The severity of the state of our credit markets, should be a wake up call for anyone who has not yet made the time to get educated on what’s been going on in our financial markets, today and over the last 20 years.

Understanding the speculation that led to the Great Depression, the repeal of the Glass Steagall Act and how less regulation has impacted the banking industry, the global impacts of our financial system, should all be considered as we head into uncharted territory and try to figure out how to move forward.

I don’t have the answer of what exactly will fix this mess, but I do know that a well thought out plan needs to be crafted, that includes restoring liquidity to our credit markets, decreasing our dependence on credit and restoring common sense rules to the process of issuing credit to consumers. It should include many other items, including accountability, that I will not go into at this time.

Today we lost $1.1 trillion dollars in net worth as a result of the market’s 778 point drop, which represented a 7% drop and the biggest point drop ever! In case you are wondering how this compares to previous drops, here is a list of historic stock market collapses:

12.8%: Drop in the Dow Jones Industrial Average (DJIA) on Black Tuesday (Oct. 29, 1929)

22.6%: 508 points Largest one-day percentage drop in stock market history (Black Monday, Oct. 19, 1987)

4.4%: 504 point drop in the DJIA on Sept. 15, 2008

(If the markets continue to drop, there are circuit breakers that were introduced after the crash in October 1987 and then further revised to take into account the increased volume and index levels. There are trigger levels or circuit breakers for a one day decline of 10%, 20% and 30% of the DJIA. These levels are calculated at the beginning of each calendar quarter using the average closing value of the DJIA for the previous month to establish specific point values for each quarter.)

For more information on this, check out the SEC’s website.

Unfortunately this credit crisis and the fall in the financial markets impacts all of us directly, through our 401k, IRA, money markets, annuities and just as importantly being unable to obtain access to home loans, business loans etc.

We need to move beyond partisan labels and the finger pointing, because the impacts, in the end, will be felt by everyone.

Disclaimer: All information in this post is subject to change without notice and is an opinion, is not guaranteed, may be time sensitive, as well as based on information collected from many sources which are not guaranteed to be reliable.

It was quite an eventful day as democrats and republicans tried to get a handle on what's going on with our financial system. Not sure there is a perfect solution, but what's clear is that no one wants to hand over a blank check without firm oversight. Dow was up almost 197 points on hopes that an agreement could be reached, but alas that was not to be.

Let's recap:

• Washington Mutual's branch system and deposits bought by JP Morgan after regulators seized the savings and loan. This now represents the largest bank failure in U.S. history. (This happened after the close of business)

• Weekly initial jobless claims jumped 32,000 to a seven-year high of 493,000.

• Durable goods orders fell 4.5% in August, well below the estimate of a 1.9% decline. Ex-transportation, orders fell 3.0%, south of the forecast of a 0.5% drop. Growth in Japan has been weak, and Europe appears to have entered a recession, which are most likely contributing to orders being down.

• New home sales fell 11.5% in August to an annual rate of 460,000, short of the estimate of a 1.0% decline to 510,000. The supply of homes rose from 10.3 months to 10.9 months. Existing home sales, which make up over 80% of residential sales have stabilized over the past year, but new home sales remain in a downward spiral. In order for prices can stabilize, it is critical for the market to absorb the excess inventory on the market.
• Existing Home Sales were down in August following a gain in July as tight mortgage credit was blamed on the slow down. Nationally, existing-home sales declined 2.2%.

It looks like further negotiations are needed to come to an agreement on how to handle this mess as the meeting/photo op at the White House today was unsuccessful in building a consensus. Secretary Paulson provided a 2 1/2 page outline of what he and Chairman Bernanke would like to do, which included little to no oversight, no accountability and a $700 billion price tag.

Congress is asking for:

• Legislation to help homeowners avoid foreclosure;
• limiting compensation to executives of troubled firms receiving assistance, ie, no golden parachutes;
• greater oversight than the limited bi-annual reporting requested in the current proposal;
• giving taxpayers an equity stake in companies;
• decreasing the timeframe for the Treasury workout from two years to one; and
• limiting the initial outlay followed by a reassessment early next year prior to providing additional funds.

We'll see what happens over the next few days!

Disclaimer: All information in this post is subject to change without notice and is an opinion, is not guaranteed, may be time sensitive, as well as based on information collected from many sources which are not guaranteed to be reliable.

It's clear that the optimism from last Friday has quickly given way to a no confidence vote for Treasury Secretary Paulson's plan. 

Today's highlights:

• The Dow was down by 372.75 points but the big story is gold rising by $40 and oil rising by $15 per barrel to close at $120. 
• Morgan Stanley has received approval to become a bank holding company and talks between them and Wachovia are on hold.
• Goldman Sachs received approval to become a bank holding company.

Giving Goldman and Morgan bank status basically allows them access to money through deposits, which would help manitain their liquidity needs.

Secretary Paulson and Fed Chairman Bernanke will be testifying before the Senate Banking Committee tomorrow.  Here are some details of the plan for the plan, as I know it:

• Secretary Paulson is asking for $700 billion
  
• Original plan was to purchase non performing mortgage securities, but that appears to have changed to any type of non performing asset.  It's unclear how they would determine if the price that they are paying for these assets is fair.  In theory the banks would submit the assets with a price, but this approach leads to many more questions.
• Foreign banks can also participate, if they have U.S. operations......ummmmm.
• Increases the debt ceiling to $11.3 trillion dollars since we'll have to issue debt to pay for all of this.
• The infrastructure for this plan has not been outlined.
• No real plan to help main street, just wall street.

It's clear the markets are not happy with this plan and there are worries about the impacts to our financial system.  More details will have to surface and hopefully Congress will not approve a hastily conceived plan without thought to the longer term impacts.  More to come as details unfold.

Existing home sales and new home sales are due out later this week.

Living in Southern California for over 35 years has made me somewhat complacent about earthquakes, but I know first hand how devastating they can be and at the very least I keep a good supply of bottled water in the house, just in case.  But I know I need to do more.

Just as most people, I get busy with other projects, work, family and at the end of the day, feel unprepared for a catastrophic event.

On November 13th, 10am, the the Great Southern California ShakeOut will take place.  This drill, quite possibly the largest earthquake preparedness exercise in U.S. history, includes businesses, hospitals,schools, non-profits, neighborhood councils, basically anyone who would like to participate.

The main purpose is to create awareness and to see how our resources would fare in responding to a magnitude 7.8 quake.  If you remember the Northridge quake you saw the devastation and the damage a magnitude 6.7 earthquake can inflict.

They say there is a 67% chance that the Los Angeles area will have a magnitude 6.7 quake, or larger, in the next 30 years.  Those percentages should be a wake up call for the many who are unprepared.

If you would like to stock up on emergency supplies, check out SOS Survival Products.

To say that it’s been a crazy week is a gross understatement. Let’s recap some items:

• U.S. takes over AIG with a $85 billion bailout. This agreement states that the government is providing AIG with a loan $85 billion over a two year period, offered at 11.5%. The government also gets 79.9% equity ownership in the company. It appears at the moment that AIG’s ability to pay claims is intact.

• Lehman Bros. goes into bankruptcy and the credit markets froze, basically on concerns that other companies were going to fail.

• RTC2? Government has announced a plan to take failed assets off the books of companies, essentially by establishing a fund, similar to the Resolution Trust Corporation (RTC) that was formed during the savings and loan scandal in the late 1980’s. The cost is expected around $500 billion. The two part plan covers the private label mortgage securities underwritten by Wall Street and the already approved purchases of government backed mortgage securities, ie Fannie and Freddie. In theory it looks like the government would purchase the securities at deep discounts and maybe hire a manager to oversee the portfolio and their hope is that the enterprise eventually makes money. This plan requires Congressional approval and the details are not there yet. In case you are wondering….the net result of the RTC was a loss of about $125 billion to taxpayers.

• Last night the SEC announced it’s stopping short selling on 799 financial companies until October 2. This is a controversial decision so I’m sure there will be more to come on this one.
• Credit markets still under siege, despite the $180 billion infusion from the world’s major banks. The 3 month Treasury bill actually traded at 4 basis points, .4% a few days ago. You have to look back to the 1930’s to find T-bills under 10 basis points.
• Two money market funds traded under $1 earlier this week and it led to $89.2 billion being pulled out of money market funds on Wednesday…..I’m sure that was a record.
• Secretary Paulson announced that the government would offer to temporarily insure money market funds.

• European stocks liked the news, especially when the UK issued a ban on short selling of financials through January 2009.

• Dow is up, but keep in mind there’s lots of short covering going on today in light of the ban.

On the housing front…….Has the housing market hit bottom?

While some are comparing this real estate cycle downturn to the real estate downturn in the 1990’s, they are vastly different. The down turn in the 1990’s was driven by very high unemployment and regional factors. 

In terms of past history there have been a couple of factors that should be taken into consideration. First, the relationship between incomes and home prices—home prices can only rise so far above income-based affordability before an adjustment period kicks in. Over the long haul, homes must be priced at levels buyers can afford. July’s median house price was $204,000. Assuming a 6.4% mortgage rate, that works out to an initial after-tax monthly payment of $795, or 20.7% of after-tax income, which historically is a relatively low share of median family income. Second, we can look at the number of new-home sales per 1,000 of population, which hit a high of 5.7 at the peak in 2005 and has since plunged to 2.2, just above the all-time low of 2.1 in 1982, after which we saw a rebound.

Existing home sales rose 3.1% in July—the largest increase in 17 months and well above expectations. On the surface this looks great, unfortunately the large number of foreclosed properties being sold at distressed prices is drawing significant buyers into some markets, lifting sales.

In some areas, foreclosures are increasing, housing inventories are higher than normal, and even well-qualified borrowers cannot receive mortgage loans. It’s become clear that credit availability will be a significant factor in a housing rebound as well as regional factors.

Another concern is that homeowners with good credit are beginning to fall behind on their mortgage payments.  The percentage of Alt-a mortgages(one step above subprime) behind on payments has quadrupled since last year, while delinquencies among prime loans have doubled over the same period. 

There are about $1 trillion in Alt-A mortgages outstanding (compared to $855 billion of subprime loans), with over 16% currently at least 60 days in arrears. Many of these loans were interest-only with the rate resets at three- to five-year intervals (“option ARMs”). Beginning next year, we will see a wave of resets with jumps as high as 4% to 8% from their initial rates. Many monthly payments are set to double!

Given all of this information......no we have not hit bottom.

While what we are going through is different in some ways from past scenarios our take away should be that our financial markets have always pulled through. In light of that information if you are a home buyer be advised that there are deals out there and I think there will continue to be deals for some time.

At the end of the day, your decision to purchase a home should be based on your specific situation. If it makes sense financially(consult with your CPA) and you find a well priced home, you should buy. Waiting for the bottom of the housing market is not all that different from waiting for the bottom of stock market.

We had another eventful day in the financial markets today:

• The Dow shed 449 points (4.1%) to close at 10610 amid fears the credit crisis will claim more victims
  
• Interest rates....The 2-year treasury bill closed at 1.64%, the 5-year treasury note 2.52%, and the 10-year treasury bond gained 14/32s to yield 3.41%
• Rumors about Morgan Stanley and WaMu's fate abounded, apparently WaMu has hired Goldman Sachs to find a buyer
  
• Financials fell after the Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to go below $1 per share, after writing off $785 million of debt issued by Lehman. Investor redemptions will be delayed as long as seven days, with the fund trading at .97 cents
• Housing starts fell to lowest level since 1991 as they fell 6.2% in August

The good news here is that we need less housing inventory on the books and the conventional wisdom has it that when housing starts are way down and housing prices are falling, we've hit bottom.

Problem with conventional wisdom is that we've never been through anything quite like this downturn before.  Interest rates are low, which is great, but money is very tight, which will make the recovery take longer.  Another bit of good news is that there are so many foreign interests involved with the US financial system that there's alot of motivation to get it back in working order.

We'll have to sit tight and see how this whole thing unravels, but also on the good news front, if it does so quickly then maybe we can begin the clean up process and build a better system.......yes, I really am a glass is half full person.

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Latest Postings

• 17. September 2008: Burbank Foreclosures And Short Sales
• 17. September 2008: What is a transfer tax?
• 14. September 2008: Bob Hope Airport Goes Green
• 13. September 2008: The Cyclic Nature of Real Estate and Burbank Real Estate Part 3
• 11. September 2008: Studio City Homes For Sale
• 9. September 2008: Burbank Foreclosures and Short Sales
• 9. September 2008: Burbank Home Sales For August 2008
• 8. September 2008: US Government's seizure of Fannie Mae and Freddie Mac
• 25. August 2008: Burbank Foreclosures and Short Sales
• 9. August 2008: Burbank Home Sales July 2008

• The Federal Reserve left rates unchanged today, at 2% for the key benchmark, a surprise to some, but while they noted that the financial markets are under more strain with the credit crisis,they cited labor worries and inflation as their top concerns.  Providing liquidity for the markets is high on their list as well.
  

• Mortgage rates are averaging 5.93% for a 30 year loan.

•  Despite the talk that the government would not intervene  AIG was offered an $85 billion loan from the US government in return for an 80% stake in the company.

What does all this mean for real estate in the San Fernando Valley and Burbank?

For now we have lower mortgage rates but very tight lending standards which means that buyers will have to work harder in order to qualify for a loan and put more money down.

In the long run we need for the financial markets to finish the clean up process in order to help stabilize our housing markets.  Look for more foreclosures to come online over the next year and hopefully a return to a more normal housing market after next year.

Here are some numbers to consider:

In August of 2005 there were a total of 80 homes/condos sold with an average of 24 days on market for an average price of $636,630.

In August of 2008 there were a total of 60 homes/condos sold with an average of 60 days on market for an average price os $555,118. 

There are several things reflected in these numbers:

• Longer days on market
• More homes are selling in the lower price ranges
• Overall prices are down, but not as much as the average would seem to suggest

This year continues to be a dizzying spiral of institutional failures.  As you can see below the fallout continues and it's not looking pretty.

Let's review what's going on:

• Lehman Bros. (the holding company) files for Chapter 11 as no buyer emerged to save the company
• Merrill Lynch, in a surprise announcement, sold itself to BofA for $44M
• AIG(American Insurance Group) is seeking capital through asset sales, cash infusions to avoid going under
• Federal Reserve has expanded it's lending capabilities
• Major Banks have created a $70B lending program for those banks in need
• Industrial Production declined 1.1% in August, far worse than expected and is likely to ease inflationary concerns for the FOMC meeting tomorrow

Banks and top brokers labored through the weekend to strike a deal for Lehman Bros., but alas it was not to be.  It turns out that no one wants the bad debt on their books.  I don't think many of the institutions left standing are feeling comfortable with their balance sheets, or the overall situation.  Early estimates have debtors getting 60 cents on the dollar.  It is unclear yet how firms that relied on Lehman for financing will fare.

The most stunning announcement so far came from Merrill Lynch, in being sold off to BofA.  This tells us that Merrill could have potentially been a bigger problem than Lehman.  BofA said they would be aggressive in cost cutting and analysts are seeing this as a risky move for the short term, but positive over the long term.

Another point to consider is the FOMC meeting tomorrow.  Rate cut rumors abound......there will certainly be much to talk about and what direction that will take interest rates will be interesting.  How that will trickle down to mortgage rates will be positive, but if lending standards remain tight, the effect will be minimal. 

The Dow is currently down about 280 points and the European markets were about 3.5% lower on the U.S. news.

• Former Federal Reserve Chairman Alan Greenspan, who served as Fed Chairman for 18 years, said this financial crisis will probably lead to the failure of more firms. He went on to say, in his interview with George Stephanopoulos, that this is the worst financial crisis he’s ever seen.

• Treasury and Federal Reserve officials are working on brokering a sale of Lehman Brothers Holdings Inc., the 158-year-old investment bank that reported a third-quarter loss of $3.9 billion.

     Given that the Fed acquired a $29 billion portfolio of mortgage-backed debt from Bear Stearns Cos. earlier this year, they are now trying to avoid using any government funds to rescue Lehman.

• Crude oil fell to a six-month low in New York, crude oil for October delivery fell $2.10, or 2.1 percent, to $99.08 a barrel oil has fallen 33 percent from a record $147.27 a barrel in July.

Thanks to falling oil prices and the resulting impact on consumer prices, Bernanke may not have to raise rates just yet, an interest rate hike had been rumored before oil started to come down and Fannie and Freddie were taken over.

As far as the Burbank and San Fernando Valley real estate market, we’re not out of the woods yet. The good news is that lower mortgage rates will continue to help buyers get into homes. We have yet to see the impact of the housing legislation passed in May, which is estimated will help about 500,000 homeowners facing foreclosure.  Prices have edged up in some areas and days on market have stabilized or gone down, from last month, which in part, indicates that homes are being priced more reasonably.  Some areas continue to be hard hit from the number of foreclosed properties coming up for sale.

Economic releases to keep your eye on for next week:

• Industrial Production
• Housing Starts
• Consumer Price Index

Search for Burbank real estate here!

Every few years the State of California mandates that cities provide a policy document that outlines programs that both promote the development of affordable housing and reduce any constraints to the development of added housing.  Individual cities that do not comply and complete this document risk losing funding for many future projects.

The draft of the General Plan Housing Element Update Project No. 07-0005885 GPA became available in February and City of Burbank has been holding public meetings to discuss the various elements of this plan and any mitigations that may be required.

On Monday, September 22, 2008 at 6pm the City of Burbank Planning Board will be holding a public hearing on the General Plan Housing Update and the proposed Negative Declaration.  The meeting will be held at the City Council Chambers, Burbank City Hall, 275 East Olive Avenue.

In case you are wondering....a negative declaration is a document that basically says that after the completion of a proposed project there will not be any significant negative effects on the environment.

I highly encourage interested Burbank residents to attend this meeting as this will be your opportunity to explore positive changes as well as voice any concerns and ask questions as to how this plan might affect Burbank real estate and/or quality of life.